Chapter 5

Revaluations and impairment testing of

non-current assets

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Learning objectives
Understand how and when to revalue an item of

property, plant and equipment in accordance with

AASB 116
Understand how and when to revalue an
intangible asset in accordance with AASB 138
Understand the difference in accounting
treatments for upward revaluations to fair value,
as opposed to downward revaluations to
recoverable amount
Understand what an impairment loss is and
know how to account for one
Continues/
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Learning objectives (cont.)

Understand how to account for revaluations that

act to reverse previous revaluation increments

and decrements
Understand how to account for accumulated
depreciation when a non-current depreciable
asset is revalued
Understand that, subsequent to revaluation, new
depreciation charges will be based on the
revalued amount of the non-current asset
Know how the profit is determined on disposal of
a revalued non-current asset
Continues/
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Learning objectives (cont.)

Understand how asset revaluations can affect an

organisations profits owing to changes in

depreciation expenses and in final profits or
losses on the sale of the revalued asset
Be able to explain possible motivations driving an
organisation to elect to/not to revalue its noncurrent assets to fair value
Know the disclosure requirements pertaining to
asset revaluations

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Status of newly converged accounting

standards

Prior to 2005, accounting standard for

revaluations was AASB 1041 Revaluation of
Non-Current Assets
Now there are two standards:
AASB 116 Property, Plant and Equipment
Requirements for revaluations, depreciation and
determining acquisition cost of property, plant and
equipment
2. AASB 138 Intangible Assets Revaluation of intangible
assets and other issues
1.

Continues/
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Status of newly converged accounting

standards (cont.)
Prior to 2005, accounting standard for

recoverable amount write-downs was AASB 1010

Recoverable Amount for Non-Current Assets
Now the standard is AASB 136 Impairment of
Assets

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Introduction
Historical cost has been criticised for bearing no

relation to current asset values

In Australia, entities may revalue many noncurrent assets

AASB 138 specifically excludes the revaluation of

some intangibles

Asset revaluations
Recognising a reassessment of the carrying amount of
a non-current asset to fair value as at a particular date
Excludes recoverable amount write-downs (i.e.
impairment losses)
Continues/

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Introduction (cont.)
If a non-current assets carrying amount exceeds

its recoverable amount it must be written down

to its recoverable amount (AASB 136)

The write-down is called an impairment loss

Carrying amount: cost of asset (or revalued
amount) less accumulated depreciation or
impairment losses
Recoverable amount: higher of an assets net
selling price and value in use
Continues/

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Introduction (cont.)

Net selling price: amount obtained from the sale

of an asset in an arms length transaction between
knowledgeable, willing parties less the costs of
disposal
Value in use: present value of the future cash
flows expected from an asset

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Measuring property, plant and equipment at

cost or fair value

AASB 116 requires each class of property, plant and

equipment to be measured at either cost or fair value

Examples of classes are land and buildings, machinery and

motor vehicles

Some classes can be measured at cost and others at fair

value
With a mix of measurement methods, is the total balance
of non-current assets meaningful?
Entities may switch from fair value to cost for justifiable
reasons and provided adequate disclosures are made
(AASB 116)
Continues/
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Measuring property, plant and equipment at

cost or fair value (cont.)
Where an entity changes from cost to fair value

for a class of non-current assets and there was a

previous impairment loss (AASB 116):
any increase in an assets carrying amount is first
recognised as income; and
any excess above the amount if no impairment loss
was recognised is transferred to a revaluation reserve

If a class of non-current assets is measured at

cost, AASB 136 is to be applied

If an assets carrying amount is greater than its

recoverable amount, an impairment loss must be
recognised
This is not a revaluation

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The use of fair values

Any revaluation of non-current assets must be to fair

value (AASB 116)

Fair value is the amount for which an asset could

be exchanged between knowledgeable, willing

parties in an arms length transaction
Fair value is determined on the assumption that
the entity is a going concern
Market price is to be used where an active and
liquid market exists for the asset
Continues/

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The use of fair values (cont.)

The required disclosures regarding asset

revaluations (AASB 116) are:

effective date of revaluation

whether an independent valuer was involved
methods and assumptions applied
extent to which fair values were determined, with
reference to observable prices in active markets or
recent market transactions
for each revalued class, the carrying amount if the cost
model was used
the revaluation reserve, indicating change for the period
and any restrictions on distribution of the balance to
shareholders Continues/

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The use of fair values (cont.)

Revaluations must be made with sufficient

regularity so the carrying amount of each asset in

the class does not differ materially from its fair
value (AASB 116)
If values change regularly and changes are
material, revaluations might be necessary each
reporting period
Otherwise every three to five years is sufficient

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Revaluation increments
General procedure (AASB 116):

Debit

Asset
Credit

Revaluation reserve

Revaluation reserve is part of shareholders

funds (owners equity)

Directors may approve cash distributions to
shareholders from revaluation reserves but they
must exercise extreme caution
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Treatment of balances of accumulated

depreciation upon revaluation

If a revalued asset is a depreciable asset, any balance of

accumulated depreciation is credited to the asset account prior
to revaluation (AASB 116)
Journal entry (net-amount method):
Debit

Accumulated depreciation
Credit Asset

Refer to Worked Example 5.1

Subsequent depreciation is to be based on the revalued amount
of the asset
Continues/
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Treatment of balances of accumulated

depreciation upon revaluation (cont.)
Alternative method (AASB 116)
Accumulated depreciation may be restated
proportionately with the change in gross carrying
amount of the asset, so the carrying amount after
revaluation equals the revalued amount
This is referred to as the gross method

Journal entry:

Debit

Asset

Credit
Accumulated depreciation
Credit
Revaluation reserve
Refer to Worked Example 5.2
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Revaluation decrements
In line with the concept of conservatism,

revaluation decrements are recognised as an

expense in the profit and loss account
Journal entry (AASB 116):
Debit

Loss on revaluation of asset

Credit
Asset

Refer to Worked Example 5.3

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Reversal of revaluation decrements and

increments
For an asset class, reversals of previous revaluations
should be recorded by the reverse of the initial revaluation
entries
If a revaluation decrement reverses a previous increment
for the same asset:

Debit
Debit
Credit

Revaluation reserve
Loss on revaluation (any excess)
Asset

Refer to Worked Example 5.4

Continues/
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Reversal of revaluation decrements and

increments (cont.)
If a revaluation increment reverses a previous

decrement for the same asset:

Debit

Asset
Credit
Credit

Gain on revaluation
Revaluation reserve (any
excess)

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Accounting for profit on disposal of a

revalued non-current asset
Gain or loss from derecognition of an item of

property, plant and equipment is to be calculated

as the difference between (AASB 116):
net disposal proceeds (if any); and
the assets carrying amount

Derecognition:
the point in time when an asset is removed from the
balance sheet
when an asset is sold; or
when no future economic benefits are expected from
an assets use or disposal
Continues/

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Accounting for profit on disposal of a

revalued non-current asset (cont.)
When an asset is sold, any resulting balance in

the revaluation reserve (AASB 116):

may be transferred directly to retained earnings
cannot be transferred to the profit and loss account

If a non-current asset is revalued upwards, any

gain on sale will be less than the gain if the asset

was not revalued
Refer to Worked Examples 5.5, 5.6 and 5.7

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Consideration of present values

Recoverable amount is the higher of an assets

net selling price and its value in use (AASB 136)

Value in use (AASB 136):

is the present value of the future cash flows expected

from an asset

Estimating value in use (AASB 136) involves:

estimating future cash inflows and outflows from the
continued use and subsequent disposal of the asset;
and
applying the appropriate discount rate to the future
cash flows

Discounting future cash flows will decrease the

calculated recoverable amount

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Offsetting revaluation increments and

decrements
The old AASB 1041 required increments and

decrements to be offset against each other within

a class of non-current assets
Now, increments and decrements may be offset
only to the extent that they relate to a particular
asset (AASB 116)

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Economic consequences of asset

revaluations
If contracts in place are tied to reported profits

(debt or management compensation),

management might have an incentive not to
revalue
However, if assets are increased a revaluation
might loosen constraints such as debt-to-assets
restrictions
Firms subject to political scrutiny might be more
likely to undertake upward revaluation resulting in
a reduction in profits
As the perceived competence of independent
valuers increases, audit time might be reduced
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Disclosure requirements
AASB 116 includes various disclosure

requirements relating to the revaluation of noncurrent assets

These were previously discussed under the
heading The use of fair values

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Summary
The chapter considers the revaluation of non-

current assets, with the emphasis on property,

plant and equipment
If the recoverable amount is below the carrying
amount, an impairment loss should be recorded
For upwards revaluations:
assets are to be revalued to fair value
any increase is to be transferred to a revaluation
reserve, unless it is a reversal

For downwards revaluations:

any decrease is to be treated as an expense, unless it

is a reversal
Continues/

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Summary (cont.)
When a revaluation is undertaken:
any existing accumulated depreciation should be
credited against the non-current asset; and
the non-current asset should be increased by the
amount of the revaluation

Where a revalued asset is sold, the gain or loss

is the difference between the carrying amount

and the net disposal proceeds of the asset
The chapter also discusses how revaluations can
loosen certain accounting-based debt covenants

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Summary of main changes to accounting

standards
Previously it was permitted to offset increments and

decrements within a class of property, plant and

equipment. Now this must be done on an asset-byasset basis
Previously future cash flows could be discounted to
present values, but they did not have to be. Now
there is an explicit requirement for future cash flows
to be discounted to present values
Continues/

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Summary of main changes to accounting

standards (cont.)
Previously when a revalued asset was sold it was

permissible but not required to transfer any related

revaluation increment to retained earnings. Now
when a revalued asset is sold any related revaluation
increment must be transferred to retained earnings
Previously the account was referred to as an asset

revaluation reserve. Now it is to be referred to as a

revaluation reserve

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