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Chapter 5 Revaluation of non-current assets. Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and.

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Presentation on theme: "Chapter 5 Revaluation of non-current assets. Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and."— Presentation transcript:

1 Chapter 5 Revaluation of non-current assets

2 Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 5-2 Objectives Understand how and when to revalue a non-current asset in accordance with FRS-3. Understand how and when to revalue a non-current asset in accordance with FRS-3. Understand the difference in accounting treatments for upward revaluations to fair value, as opposed to downward revaluations to recoverable amount. Understand the difference in accounting treatments for upward revaluations to fair value, as opposed to downward revaluations to recoverable amount.

3 Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 5-3 Objectives (cont.) Understand how to account for revaluations that act to reverse previous revaluation increments and decrements. Understand how to account for revaluations that act to reverse previous revaluation increments and decrements.

4 Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 5-4 Objectives (cont.) Understand how to account for accumulated depreciation when a non-current depreciable asset is revalued, and appreciate that, subsequent to revaluation, new depreciation charges will be based on the revalued amount of the non-current asset. Understand how to account for accumulated depreciation when a non-current depreciable asset is revalued, and appreciate that, subsequent to revaluation, new depreciation charges will be based on the revalued amount of the non-current asset.

5 Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 5-5 Objectives (cont.) Know how the profit on disposal of a revalued non-current asset is determined and understand how asset revaluations can affect an organisations profits due to changes in depreciation expenses and in final profits or losses on the sale of the revalued assets. Know how the profit on disposal of a revalued non-current asset is determined and understand how asset revaluations can affect an organisations profits due to changes in depreciation expenses and in final profits or losses on the sale of the revalued assets.

6 Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 5-6 Objectives (cont.) Be able to explain what might motivate an organisation to elect to, or alternatively, not elect to revalue its non-current assets upwards. Be able to explain what might motivate an organisation to elect to, or alternatively, not elect to revalue its non-current assets upwards. Know the disclosure requirements contained in FRS-3. Know the disclosure requirements contained in FRS-3.

7 Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 5-7 Introduction Within New Zealand, non-current assets may be revalued upwards or downwards to reflect the fair value of the assets. Within New Zealand, non-current assets may be revalued upwards or downwards to reflect the fair value of the assets. Revaluation is the act of recognising a reassessment of values of non-current assets as at a particular date. Revaluation is the act of recognising a reassessment of values of non-current assets as at a particular date. Asset must not exceed its recoverable amount following revaluation. Asset must not exceed its recoverable amount following revaluation.

8 Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 5-8 Carrying amount in excess of recoverable amount When carrying amount exceeds recoverable amount, write-down to recoverable amount is required. When carrying amount exceeds recoverable amount, write-down to recoverable amount is required. Governed by FRS-3. Governed by FRS-3.

9 Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 5-9 Measuring at cost or fair value When an item meets asset recognition criteria, each class of non-current asset is measured at cost. When an item meets asset recognition criteria, each class of non-current asset is measured at cost. Entity can elect to change measurement basis to fair value. Entity can elect to change measurement basis to fair value. Entire class of asset must be recorded on the same basis. Entire class of asset must be recorded on the same basis.

10 Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 5-10 Measuring at cost or fair value (cont.) Non-current assets must be written down to recoverable amount when carrying amount exceeds recoverable amount. Non-current assets must be written down to recoverable amount when carrying amount exceeds recoverable amount. Write-downs not considered to be revaluations. Write-downs not considered to be revaluations. Does not require write-down of entire class of assets in this case. Does not require write-down of entire class of assets in this case.

11 Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 5-11 Definition of recoverable amount Recoverable amount, in relation to an asset, means the net greater of net market value and value in use. Recoverable amount, in relation to an asset, means the net greater of net market value and value in use. Net market value is the fair value less the costs of disposal. Net market value is the fair value less the costs of disposal. Value in use is determined by discounting the expected future cash flows obtained from an assets continuing use and ultimate disposal at an appropriate discount rate. Value in use is determined by discounting the expected future cash flows obtained from an assets continuing use and ultimate disposal at an appropriate discount rate.

12 Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 5-12 Use of fair value Any revaluation must be to fair value. Any revaluation must be to fair value. Governed by FRS-3. Governed by FRS-3. Before issue of FRS-3, no specific requirement to use fair values Before issue of FRS-3, no specific requirement to use fair values –previously revalued amount was not to exceed recoverable amount.

13 Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 5-13 Definition of fair value Defined as the amount for which an asset can be exchanged, or a liability settled, between knowledgeable, willing parties in an arms length transaction. Defined as the amount for which an asset can be exchanged, or a liability settled, between knowledgeable, willing parties in an arms length transaction. Fair value determined on the basis of a going concern. Fair value determined on the basis of a going concern. If active or liquid market then market value equals fair value. If active or liquid market then market value equals fair value.

14 Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 5-14 Valuation to be kept up to date Once it is decided to revalue, valuations must be kept up to date. Once it is decided to revalue, valuations must be kept up to date. If frequent material changes in value, then revaluation could be required each accounting period. If frequent material changes in value, then revaluation could be required each accounting period. If no material changes, revaluation every three years would be sufficient. If no material changes, revaluation every three years would be sufficient. Maximum interval between revaluations is five years. Maximum interval between revaluations is five years.

15 Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 5-15 Revaluation increments General procedure General procedure Dr Asset Cr Asset revaluation reserve Asset revaluation reserve is part of equity. Asset revaluation reserve is part of equity. Directors may approve cash distributions to shareholders, provided that, immediately after distribution, the company satisfies the solvency test. Directors may approve cash distributions to shareholders, provided that, immediately after distribution, the company satisfies the solvency test.

16 Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 5-16 Treatment of accumulated depreciation upon revaluation If the revalued asset is a depreciable asset, any balance of accumulated depreciation is credited to the gross carrying amount of the item. If the revalued asset is a depreciable asset, any balance of accumulated depreciation is credited to the gross carrying amount of the item. Journal entry: Journal entry: Dr Accumulated depreciation Cr Asset Subsequent depreciation based on revalued amount. Subsequent depreciation based on revalued amount.

17 Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 5-17 Revaluation decrements and deficits In line with concept of prudence, decrements go to statement of financial performance. In line with concept of prudence, decrements go to statement of financial performance. Journal entry: Journal entry: Dr Loss on revaluation asset Cr Asset

18 Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 5-18 Reversal of revaluation decrements and increments With respect to a class of assets, reversals of previous revaluations should, as far as possible, be accounted for by entries that are the reverse of those entries bringing the previous revaluations to account. With respect to a class of assets, reversals of previous revaluations should, as far as possible, be accounted for by entries that are the reverse of those entries bringing the previous revaluations to account.

19 Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 5-19 Reversal of revaluation increments Where revaluation decrement reverses a previous increment it will be debited to the asset revaluation reserve account and not to the statement of financial performance. Where revaluation decrement reverses a previous increment it will be debited to the asset revaluation reserve account and not to the statement of financial performance. Any excess over the previous revaluation increment is debited to the statement of financial performance. Any excess over the previous revaluation increment is debited to the statement of financial performance.

20 Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 5-20 Reversal of revaluation decrements Where revaluation increment reverses a previous revaluation decrement, it is credited to the statement of financial performance. Where revaluation increment reverses a previous revaluation decrement, it is credited to the statement of financial performance. Any excess over the previous revaluation decrement would be credited to the asset revaluation reserve. Any excess over the previous revaluation decrement would be credited to the asset revaluation reserve.

21 Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 5-21 Accounting for profit or loss on disposal of a revalued non-current asset Profit or loss on disposal of revalued item of PPE is measured as the difference between the carrying amount of the revalued asset at the time of disposal and net proceeds (if any) from disposal. Profit or loss on disposal of revalued item of PPE is measured as the difference between the carrying amount of the revalued asset at the time of disposal and net proceeds (if any) from disposal.

22 Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 5-22 Asset revaluation reserve account pertaining to disposed asset No guidance on how to treat this in accounting standards. No guidance on how to treat this in accounting standards. Options: Options: –leave the balance as is; –transfer the balance to another reserve (asset realisation reserve or capital profits reserve); or –transfer balance to retained earnings.

23 Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 5-23 Consideration of present values Recoverable amount defined as the greater of net market value and value in use. Recoverable amount defined as the greater of net market value and value in use. Difficulties exist with the definition of recoverable amounts. Difficulties exist with the definition of recoverable amounts. No necessity for net market value to be discounted as it is already expressed at current value. No necessity for net market value to be discounted as it is already expressed at current value. Is the requirement that expected future cash flows be discounted when determining value in use logical? Is the requirement that expected future cash flows be discounted when determining value in use logical?

24 Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 5-24 Offsetting increments/ decrements within a class of assets FRS-3 requires revaluation increments and decrements to be offset against one another within a class of non-current assets. FRS-3 requires revaluation increments and decrements to be offset against one another within a class of non-current assets. Increments and decrements are not to be offset in respect of different classes of non- current assets. Increments and decrements are not to be offset in respect of different classes of non- current assets.

25 Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 5-25 Change in measurement base Where a change in measurement base for a class of PPE has been made, this must be accounted for as a change in accounting policy. Where a change in measurement base for a class of PPE has been made, this must be accounted for as a change in accounting policy.

26 Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 5-26 Economic consequences of asset revaluations If contracts in place are tied to reported profits (debt or management compensation), management may have incentive not to revalue. If contracts in place are tied to reported profits (debt or management compensation), management may have incentive not to revalue. However, if assets are increased, the revaluation may loosen constraints such as debt/assets restrictions. However, if assets are increased, the revaluation may loosen constraints such as debt/assets restrictions. Firms subject to political scrutiny may be more likely to undertake upward revaluation resulting in a reduction in profits. Firms subject to political scrutiny may be more likely to undertake upward revaluation resulting in a reduction in profits.

27 Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 5-27 Disclosure requirements Detailed and contained in FRS-3 Detailed and contained in FRS-3 –Where a class of PPE is stated at revalued amount, the following must be disclosed: revaluation surplus revaluation surplus intervals at which valuations take place intervals at which valuations take place dates and amounts of valuations supporting recognised valuations dates and amounts of valuations supporting recognised valuations names and qualifications of valuers names and qualifications of valuers bases of valuations bases of valuations any special assumptions or limiting conditions any special assumptions or limiting conditions where the cyclical basis of valuation adopted, that fact and an explanation of the basis used. where the cyclical basis of valuation adopted, that fact and an explanation of the basis used.

28 Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 5-28 Disclosure requirements (cont.) –Where a class of PPE is no longer revalued because of a change in accounting policy, the following must be disclosed: the fact that the class of items is no longer accounted for under the modified historical cost system; and the fact that the class of items is no longer accounted for under the modified historical cost system; and the basis upon which the class of item is now accounted for. the basis upon which the class of item is now accounted for.

29 Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 5-29 Disclosure requirements (cont.) –Where items of PPE are revalued, the following must be disclosed: as a separate component of total recognised revenues and expenses, the sum of all revaluation increments and decrements recognised in the SOME during the period as a separate component of total recognised revenues and expenses, the sum of all revaluation increments and decrements recognised in the SOME during the period the sum of all revaluation increments and decrements recognised in the statement of financial performance during the period. the sum of all revaluation increments and decrements recognised in the statement of financial performance during the period.

30 Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 5-30 Disclosure requirements (cont.) –Where the measurement base for any class of PPE has been changed, the following must be disclosed: the change in accounting policy in accordance with FRS-1 the change in accounting policy in accordance with FRS-1 whether the measurement base has been changed previously and, if so, when. whether the measurement base has been changed previously and, if so, when.


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