1 COMPANY ACCOUNTING IN AUSTRALIA – 5 th edition Ken Leo & John Hoggett CHAPTER 12 REVALUATION AND IMPAIRMENT OF NON-CURRENT ASSETS.
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1 COMPANY ACCOUNTING IN AUSTRALIA – 5 th edition Ken Leo & John Hoggett CHAPTER 12 REVALUATION AND IMPAIRMENT OF NON-CURRENT ASSETS
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 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 AASB 1041 Applies to non-current assets Does not include Inventories which have to be valued @ the lower of cost or market value.
5 AASB 1041 – measurement choices 2 choices cost basis or fair value basis FV = current market price by class of assets
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 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 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 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 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
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 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 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 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 The cost method Asset recorded at cost of acquisition Depreciated as per AASB 1021 Recoverable amount test applied
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 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 The recoverable amount test If recoverable amount < carrying amount - write down the asset - recognise an expense - write-back accumulated depreciation
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 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 Impairment test ED 99 “Impairment of Assets”, issued December 1999. <<Since Withdrawn>> Expect impairment standard to replace AASB 1010 Recoverable amount in the future