1. 1 COMPANY ACCOUNTING IN AUSTRALIA – 5 th edition Ken Leo & John Hoggett CHAPTER 12 REVALUATION AND IMPAIRMENT OF NON-CURRENT ASSETS

2. 2 Learning objectives 1. To understand principles of AASB 1041 2. To prepare journal entries – revaluation increments & decrements 3. To account for depreciation subsequent to revaluation 4. To apply the disclosure requirements:AASB 1041 5. To be able to account for the recoverable amount test

3. 3 Revaluation & Recoverable amount AASB 1041 allows companies to revalue non-current assets to their fair values AASB 1010 states that assets cannot be valued at greater than their recoverable amount

4. 4 AASB 1041 Applies to non-current assets Does not include Inventories which have to be valued @ the lower of cost or market value.

5. 5 AASB 1041 – measurement choices 2 choices cost basis or fair value basis FV = current market price by class of assets

6. 6 Net revaluation increment - example An entity acquires land for $75 000. Asset is revalued to $100 000. Tax rate is 30% LandDr25 000 Asset Reval’n ReserveCr25 000 Asset Reval’n ReserveDr7 500 Deferred Tax LiabilityCr7 500 NB for increment the ARR must be the after tax adjustment

7. 7 Revaluation Increment– depreciable assets Entity has depreciable asset at carrying amount of $100 000 – cost $120 000, accumulated depreciation $20 000. Revalue to $110 000. Tax base is $100 000. Accum. Depreciation20 000 Asset 20 000 Asset 10 000 ARR 10 000 ARR 3 000 Deferrd Tax Liability 3 000

8. 8 Net revaluation decrement Recognise as expense in P&L Asset carried at $100 000, cost $120 000. Revalued to $90 000. Accum. Depreciation20 000 Asset 20 000 Expense 10 000 Asset 10 000

9. 9 Revaluation decrement – tax-effect No tax-effect entry necessary - not adjusted via other equity account - tax-effect worksheet will adjust for difference between tax base and carrying amount

10. 10 Net decrement reverses  prior revaluation increment Firstly adjust against existing Revaluation Reserve – consider tax-effect Asset has carrying amount of $50, previously revalued upwards by $10, now revalued down to $35. Asset Reval’n Reserve 7 Deferred Tax Liability 3 Asset 10 Expense 5 Asset 5

11. 11 Revaluation increment reverses prior decrement  Asset carried at $100, accumulated depreciation of $20, revalued to $130. Previously revalued downwards by $10. Accum. Depn 20 Asset 20 Asset 10 Revenue 10 Asset 20 ARR 14 Deferred Tax Liability 6

12. 12 Depreciation of revalued assets  Both AASB 1041 and AASB 1021 require the calculation of depreciation as a process of allocation. At 1/7/02, asset revalued to $100. Useful life is 5 years.. Depreciation is $20 However company will need to look at the Fair Value @ end of the year may need to revalue again.

13. 13 Disclosure requirements – where assets at fair value  AASB 1041, paragraph 9: Method used to determine fair values Statement re independent valuation If index of replacement costs used Balance of revaluation reserve

14. 14 Disclosure requirements  AASB 1041, paragraph 4.1: Whether cost or fair value is used, show for each class of assets a reconciliation of carrying amount at beginning and end of period, showing:  Additions  Disposals  Acquisitions via acquiring other entities  net revaluation increment  recoverable amount write-downs  reversals of recoverable amount write-downs  depreciation expense  other movements-

15. 15 Disclosure requirements  AASB 1018 Net credit or debit to asset revaluation reserve Net increment/decrement for each class of non- current assets AASB 1040 Total reserves For each reserve: description of nature and purpose amount at beginning of period nature and amount of each increase/decrease amount as at reporting date

16. 16 The cost method  Asset recorded at cost of acquisition Depreciated as per AASB 1021 Recoverable amount test applied

17. 17 AASB 1010  AASB 1010 “Recoverable Amount of Non- Current Assets”, issued 1999 Does NOT apply to: assets measured at fair value or net market value inventories not-for-profit entities

18. 18 The recoverable amount test  Compare carrying amounts of assets with recoverable amounts Recoverable amount is the net amount expected to be recovered through cash inflows/outflows arising from continued use and subsequent disposal

19. 19 The recoverable amount test  If recoverable amount < carrying amount - write down the asset - recognise an expense - write-back accumulated depreciation

20. 20 The recoverable amount test  An asset is carried at $12 000 - cost of $20 000 and accumulated depreciation of $8000. Recoverable amount estimated to be $10 000. Accum. DepreciationDr8 000 AssetCr8 000 Expense Dr 2 000 Asset Cr 2 000 Depreciation now based on $10 000

21. 21 Disclosures - AASB 1010  For assets written down in the current period, for each class of assets: - carrying amount - amount of write-down - assumptions made in determining recoverable amount Assets measured at recoverable amount, less depreciation Whether cash flows have been discounted in determining recoverable amount

22. 22 Impairment test  ED 99 “Impairment of Assets”, issued December 1999. <<Since Withdrawn>> Expect impairment standard to replace AASB 1010 Recoverable amount in the future

23. 23 Tutorial Questions Exercise 12.1 Exercise 12.2 Exercise 12.3