PROPERTY PLANT AND EQUIPMENT - IAS 16

May 1, 2020

 

 

 

 

 

IAS 16 on property plant and equipment allows for two approaches to accounting for long-lived tangible assets.

 

The first one is the historical cost method, where you take the cost of the machinery when it was purchased, include installation costs and other costs incurred to bring the machinery to the present location and condition and start depreciating the machinery over the useful life of the asset.

 

The second method which is called the revaluation method. Companies may choose to adopt this method, if they feel that the fair value of the machinery can be measured easily and reliably. If the fair value of the machinery can be measured easily and reliably, then the machinery can be carried at the revalued amount. 

 

If the assets are valued at the revalued amounts, then the depreciation is charged by using the same methods suggested by IAS 16. 

 

There are a number of reasons why a company choose to revalue assets.

One of the reasons for revaluing assets could be to show that the fair market value of  the asset has increased considerably since the asset was purchased.

A company also chooses to revalue assets to compare the value of assets bought in different point of time. This is because, when the historical cost method is followed, all the assets in the same class cannot be compared because they were bought in different point of time. If the assets are revalued periodically, the company would keep abreast with the changes in fair value by changing the value of the assets periodically. This will help comparing the assets of the same class.

 

How to revalue assets?

If a company decides to adopt revaluation model, then all the assets in that particular class have to be revalued, For example, if the company decides to adopt revaluation model for buildings, it has to adopt this for all buildings.

The other thing the company has to do once it decides to adopt revaluation model is that, it has to revalue assets on consistent and regular basis. So end of each accounting period, it has to revalue assets approximating the value of the asset to the then prevailing fair value.

 

Advantages of revaluation method advantages of using revaluation method, advantages of revaluing assets. advantages of revaluation. benefits of revaluation of assets

 

The advantage of adopting revaluation model is the comparability of similar assets. For example, if assets have been valued under historical cost method, they would have been acquired at different points of time, like building A in year 2005, building B in year 2010 and building C in year 2018. Also they would have been acquired at different prices prevailing at that point of time. So if you look at comparing them in year 2020, it does not make any sense. If you adopt the revaluation method instead, as the value of aseets will be on par with the then prevailing fair market value, comparing the value of all the three buildings will make a lot more sense.

 

Accounting Entries

 

If there is an increase in initial revaluation

 

Asset                                      Dr                         XXX (to the extent of increase)

OCI                                        Cr                                 XXX (to the extent of increase)

 

If there is a decrease in initial revaluation

 

Impairment loss                     Dr                         XXX (to the extent of decrease)

Asset                                     Cr                                XXX (to the extent of decrease)

 

If there is an increase in subsequent revaluation

 

Asset                                      Dr                         XXX ( to the extent of increase)

Profit and loss                        Cr                                XXX (to the extent of previous impairment

loss)

OCI                                        Cr                                 XXX (remaining increase)

 

If there is a decrease in subsequent revaluation

 

OCI                                         Dr                         XXX ( to the extent of previous revaluation surplus)

Profit and loss                         Dr                         XXX (remaining decrease)

Asset                                       Cr                                 XXX (to the extent of decrease)

 

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PROPERTY PLANT AND EQUIPMENT - IAS 16

May 1, 2020

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