Chapter 5 Assets 1 Reporting losses and gains on revaluation 1

Measurement Subsequent to Initial Recognition IAS 16 permits two accounting models: Cost Model. The asset is carried at cost less accumulated depreciation and impairment. [IAS 16.30] Revaluation Model. The asset is carried at a revalued amount, being its fair value at the date of revaluation less subsequent depreciation and impairment, provided that fair value can be measured reliably. [IAS 16.31] 2

The Revaluation Model Under the revaluation model, revaluations should be carried out regularly, so that the carrying amount of an asset does not differ materially from its fair value at the balance sheet date. [IAS 16.31] If an item is revalued, the entire class of assets to which that asset belongs should be revalued. [IAS 16.36] Revalued assets are depreciated in the same way as under the cost model (see below). 3

If a revaluation results in an increase in value, it should be credited to other comprehensive income and accumulated in equity under the heading "revaluation surplus" unless it represents the reversal of a revaluation decrease of the same asset previously ` as an expense, in which case it should be recognized as income. [IAS 16.39] A decrease arising as a result of a revaluation should be recognized as an expense to the extent that it exceeds any amount previously credited to the revaluation surplus relating to the same asset. [IAS 16.40] When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained earnings, or it may be left in equity under the heading revaluation surplus. The transfer to retained earnings should not be made through the income statement (that is, no "recycling" through profit or loss). [IAS 16.41] 4

Key Definitions [IAS 36.6] Impairment: an asset is impaired when its carrying amount exceeds its recoverable amount Carrying amount: the amount at which an asset is ` in the balance sheet after deducting accumulated depreciation and accumulated impairment losses Recoverable amount: the higher of an asset's fair value less costs to sell (sometimes called net selling price) and its value in use Fair value: the amount obtainable from the sale of an asset in an arm's length transaction between knowledgeable, willing parties Value in use: the discounted present value of the future cash flows expected to arise from: the continuing use of an asset, and from its disposal at the end of its useful life 5

Recognition of an Impairment Loss An impairment loss should be recognized whenever recoverable amount is below carrying amount. [IAS 36.59] The impairment loss is an expense in the income statement (unless it relates to a revalued asset where the value changes are recognized directly in equity). [IAS 36.60] Adjust depreciation for future periods. [IAS 36.63] 6

impairment Expected future net cash flows less than carrying amount ? No impairment Assets held for use Assets held for disposal 1- impairment loss : excess of carrying amount over fair value. 2- Depreciate on new cost basis. 3- Restoration of loss not permitted. 1- impairment loss : excess of carrying amount over (fair value less cost of disposal) 2- No depreciation taken 3- Restoration of impairment loss permitted. 7

Recoverability of the Carrying Amount IAS 36IAS 36 requires impairment testing and, if necessary, recognition for property, plant, and equipment. An item of property, plant, or equipment shall not be carried at more than recoverable amount. Recoverable amount is the higher of an asset's fair value less costs to sell and its value in use. 8

Determining Recoverable Amount If fair value less costs to sell or value in use is more than carrying amount, it is not necessary to calculate the other amount. The asset is not impaired. [IAS 36.19] If fair value less costs to sell cannot be determined, then recoverable amount is value in use. [IAS 36.20] For assets to be disposed of, recoverable amount is fair value less costs to sell. [IAS 36.21] 9

Fair value The amount for which an asset could be exchanged between knowledge, willing parties in an arm’s length transaction. Fair value is the market value of an asset in a good market, that is one where there are willing buyers and sellers, where the parties are knowledge and where there are no forced sales. 10

Value in Use The calculation of value in use should reflect the following elements: [IAS 36.30] an estimate of the future cash flows the entity expects to derive from the asset expectations about possible variations in the amount or timing of those future cash flows the time value of money, represented by the current market risk-free rate of interest the price for bearing the uncertainty inherent in the asset other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset 11

Value to the business The present value of the future cash flows obtainable as a result of the assets continued use, including those resulting from its ultimate disposal. The higher of the net realizable and value in use is the assets recoverable amount. So when a company exercise its option to show assets at current value, rather than on the basis of historical cost, the value to the business will usually be its replacement cost, or to be more precise in the case of a fixed asset, the replacement cost of that portion of the assets that has not been consumed. Value to the business = lower of : Replacement cost Recoverable amount Recoverable amount = higher of ; Value in use Net realizable value 12

Reporting losses and gains on revaluation Revaluation gains should in general be recognized in the STRGL other than to the extent that gain reverses revaluation losses on the same asset that were recognized in the profit and loss account The exposure draft’s proposals on the treatment of revaluation losses is that :- All revaluation losses that exceed existing revaluation surpluses should be charged to the profit and loss account. Losses that are reversals of previously recognized gains should be shown in the STRGL. 13

Reporting losses and gains on disposal The profit or loss on the disposal of a tangible fixed asset should be accounted for in the profit and loss account of the period in which the disposal occurs as the difference between the disposal proceeds and the carrying amount, whether carried at historical cost. If the entity had, at some stage in the past, revalued the asset the revaluation gain would not have passed through the profit and loss account but would instead have been recorded in the STRGL. But if the asset had not been revalued the whole of the gain goes through the profit and loss account. 14

References Advanced financial accounting. ( Richard Lewis & David Pendrill) Intermediate accounting. ( Kieso) IAS 16. IAS

Thank you for your kind attention and I hope that you will be benefited from my presentation of this project Prepared by : Marwa Mahmoud 16