## **Learning Outcomes**

After studying this article, you will be able to explain how the revaluation model is applied to property, plant and equipment (PPE) under IAS 16. You will learn to account for revaluation increases and decreases, handle depreciation on revalued assets, and correctly derecognise assets on disposal or when no future economic benefits are expected.

## **ACCA Financial Reporting (FR) Syllabus**

For ACCA Financial Reporting (FR), you are required to understand both the measurement and derecognition of non-current assets. You must be able to:

- Apply the requirements of IAS 16 in relation to initial and subsequent measurement of PPE
- Account for revaluation of PPE, including the treatment of revaluation gains and losses
- Calculate and record depreciation on revalued assets
- Handle transfers between reserves, such as the revaluation surplus and retained earnings
- Account for the derecognition (disposal or retirement) of PPE and the treatment of revaluation surplus upon disposal

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. According to IAS 16, how should a revaluation increase be accounted for if an asset was previously written down?
2. When an asset carried at revalued amount is sold, what should happen to any remaining balance in the revaluation surplus related to that asset?
3. True or false? Depreciation on a revalued asset is charged on the revalued amount over the revised remaining useful life.
4. Briefly describe how to calculate the gain or loss on disposal of a revalued asset.

## **Introduction**

IAS 16 Property, Plant and Equipment requires entities to choose between the cost and revaluation models for subsequent measurement of tangible non-current assets. The revaluation model allows entities to carry assets at fair value less accumulated depreciation and impairment losses, provided that fair value can be reliably measured. This model introduces specific requirements for dealing with revaluation gains, revaluation losses, subsequent depreciation, and the derecognition of assets on disposal or retirement.

> **Key Term: revaluation model**
> A method under IAS 16 where property, plant and equipment are carried at their fair value at the date of revaluation, less subsequent accumulated depreciation and impairment losses.
>
> **Key Term: revaluation surplus**
> An equity reserve that records gains arising from the revaluation of non-current assets above their original carrying amounts.
>
> **Key Term: derecognition**
> The removal of an asset from the statement of financial position, usually as a result of sale, scrapping, or when no future economic benefits are expected.

## The Revaluation Model Under IAS 16

### Requirements and Process

Entities can choose to apply the revaluation model to all assets within the same class (e.g., all freehold buildings). The asset class must be revalued with “sufficient regularity” so that the carrying amounts do not differ materially from fair value at each reporting date.

When a revaluation occurs:

- The asset's gross carrying amount and accumulated depreciation are restated to the new fair value.
- Any revaluation increase is credited directly to equity under "revaluation surplus," except to the extent that it reverses a previous revaluation decrease recognised in profit or loss.
- Any revaluation decrease is first debited against any existing revaluation surplus for that asset and the excess is recognised in profit or loss.

### **Worked Example 1.1**

**Pigott Ltd owns land and buildings, originally recognised at a total cost of \$450,000 (land \$300,000, building \$150,000). The building’s useful life is 30 years and five years have passed. At the end of year 5, the combined asset is revalued to \$600,000 (land \$350,000, building \$250,000). What entries are required on revaluation, and how is the revaluation gain treated?**

> **Answer:**
>
> 1. Calculate the carrying amount before revaluation:
>    - Land: \$300,000 (not depreciated)
>    - Building: \$150,000 – (\$150,000 × 5/30) = \$125,000
>    - Combined carrying amount: \$425,000
> 2. Revalued amounts:
>    - Land: \$350,000 (increase \$50,000)
>    - Building: \$250,000 (increase \$125,000)
> 3. The total increase of \$175,000 (\$600,000 – \$425,000) is credited to the revaluation surplus, provided no prior revaluation decreases were charged to profit or loss for these assets.

### Accounting for Revaluation Increases and Decreases

- **Increase:** Credit to OCI as revaluation surplus. If a previous revaluation decrease was charged to profit or loss, that portion is credited back to profit or loss.
- **Decrease:** Debit first against any balance in the revaluation surplus for that asset (equity), then any excess to profit or loss.

### **Worked Example 1.2**

**An entity revalued machinery upwards by \$40,000, after a prior downward revaluation of \$20,000 that was charged to profit or loss. How is the \$40,000 increase treated?**

> **Answer:**
> The \$20,000 increase is recognised in profit or loss (to reverse the previous loss), and the remaining \$20,000 is credited to revaluation surplus within OCI.

### Depreciation on Revalued Assets

When an asset is revalued, depreciation is based on the revalued amount, less any revised residual value, and over the updated remaining useful life.

A transfer may be made from the revaluation surplus to retained earnings equal to the “excess depreciation,” being the additional depreciation generated by the revaluation. This ensures that only realised gains are presented as distributable reserves.

### **Worked Example 1.3**

**After revaluation, an asset’s value increases and annual depreciation rises from \$4,000 to \$6,000. Should the revaluation surplus be adjusted, and how?**

> **Answer:**
> The entity may transfer \$2,000 per year from the revaluation surplus to retained earnings, reflecting the excess annual depreciation arising from the revaluation. This transfer is shown within equity only and does not affect profit or loss.

### **Exam Warning**

> Omitting to adjust or transfer excess depreciation from the revaluation surplus to retained earnings is a common error. The transfer is optional under IAS 16, but you must be able to explain and perform the adjustment in calculations.

## Derecognition of PPE (Asset Disposal or Retirement)

When PPE is disposed of or no further economic benefits are expected, it must be derecognised.

- Remove the asset’s carrying amount (cost and accumulated depreciation) from the statement of financial position.
- Recognise any difference between disposal proceeds and the carrying amount as a gain or loss in profit or loss.
- Any revaluation surplus relating to the asset may be transferred directly to retained earnings (not through profit or loss).

### **Worked Example 1.4**

**Camden Ltd sold a machine (carrying amount \$20,000, revaluation surplus \$5,000) for \$22,000. What entries are made on disposal?**

> **Answer:**
>
> - Remove the asset from the statement of financial position at \$20,000.
> - Record disposal proceeds of \$22,000: gain on disposal is \$2,000 (recorded in profit or loss).
> - Transfer the \$5,000 revaluation surplus relating to the asset from revaluation surplus to retained earnings (equity only).

### Derecognition for Scrapping or Consumption

If an asset is scrapped or retired (no proceeds):

- Remove both the gross cost and accumulated depreciation.
- Transfer any relevant revaluation surplus to retained earnings.
- Recognise the loss on disposal in profit or loss.

## **Summary**

The revaluation model under IAS 16 enables entities to reflect current values in their PPE, but introduces further requirements for handling revaluation gains and losses, depreciation, and eventual asset derecognition. On disposal, any unrealised gains held in the revaluation surplus relating to the asset should be transferred to retained earnings, ensuring no double counting of gains. All gains and losses on derecognition are shown in profit or loss, except for reclassification of reserves, which are equity movements only.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Revaluation model: PPE may be carried at fair value less accumulated depreciation and impairment
- Revaluation gains go to revaluation surplus (equity via OCI); prior decreases reversed through profit or loss
- Revaluation losses first offset against any surplus for the asset, then through profit or loss
- Depreciation on revalued amount; excess depreciation may be transferred from revaluation surplus to retained earnings
- On derecognition, remove carrying amount and record any gain or loss in profit or loss
- Any related revaluation surplus is transferred directly to retained earnings, not through profit or loss

## **Key Terms and Concepts**

- revaluation model
- revaluation surplus
- derecognition

Property, plant and equipment (IAS 16) - Revaluation model and derecognition