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IFRS Initial Revaluation.

Under the revaluation model in IAS 16, at the date of initial revaluation of an item of property, plant and equipment, revaluation adjustments are accounted for as follows: (1) Increases in an assets carrying value are credited to Other Comprehensive Income (gain on revaluation); and (2) Decreases in an assets carrying value are charged to Other Comprehensive Income (loss on revaluation in the statement of comprehensive income). ExampleInitial Revaluation Assume Henan Corporation (HC) acquired a building with a cost of 100,000. After one year the building is appraised as having a current fair value of 110,000. The journal entry to increase the carrying amount of the building to its fair value is as follows: Building (Asset) 10,000 10,000

Other comprehensive incomeGain on revaluation

At the end of the fiscal period, the increase in the carrying amount of the building is accumulated in the Revaluation Surplus in the shareholders equity section of the statement of financial position. Subsequent Revaluation. In accordance with IAS 16, in subsequent periods, revaluation adjustments are accounted for as follows: (1) Increases in an assets carrying value (upward revaluation) should be recognized as income in profit or loss to the extent of the amount of previous loss on revaluation accumulated in the Revaluation Surplus, and any excess should be credited to equity; (2) Decreases in an assets carrying value (Downward Revaluation) should be charged to Other Comprehensive Income to the extent of any previous Revaluation Surplus, and any excess should credited to equity. ExampleSubsequent Revaluation In the following year, HC determines that the fair value of the building is no longer 110,000. Assuming the fair value decreased to 95,000, the following journal entry is made to record downward revaluation: Other comprehensive incomeGain on revaluation (Revaluation Surplus) Loss on revaluation Building (Expense) Building 10,000 5,000 (plug) 15,000

According to the IASB, annual revaluation is necessary for those items of property, plant and equipment which experience significant and volatile changes in fair value; items with only insignificant changes in fair value may be revalued only every three or five years. Revaluation adjustments. In general, revaluation adjustments increasing an assets carrying amount are recognized in Other Comprehensive Income and accumulated in equity as Revaluation Surplus. However, the increase should be recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognized in profit or loss. If a revalued asset is subsequently found to be impaired, the Impairment Loss is recognized in Other Comprehensive Income only to the extent that the Impairment Loss does not exceed the amount in the Revaluation Surplus for the same asset. Such an Impairment Loss on a revalued asset is first offset against the Revaluation Surplus for that asset, and only when that has been exhausted, it is recognized in profit or loss. Revaluation adjustments decreasing an assets carrying amount, in general, are recognized in profit or loss. However, the decrease should be recognized in Other Comprehensive Income to the extent of any credit balance existing in the Revaluation Surplus in respect of that asset. The decrease recognized in Other Comprehensive Income reduces the amount accumulated in equity in the Revaluation Surplus account. Under the provisions of IAS 16, the amount credited to Revaluation Surplus can either be transferred directly to Retained Earnings (RE), (but not through the income statement [profit and loss account]!), as the asset is being depreciated, or it can be held in the Revaluation Surplus account until such time as the asset is Disposed of or retired from service. Some of the Revaluation Surplus may be transferred directly to Retained Earnings (RE) as the asset is used by an entity. Any transfer to Retained Earnings (RE) is limited to the amount equal to the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the assets original cost. In addition, Revaluation Surplus may be transferred directly to Retained Earnings (RE) when the asset is derecognized. This would involve transferring the whole of the surplus when the asset is retired or disposed of. Important to remember is that transfers from Revaluation Surplus to Retained Earnings (RE) are not made through profit or loss!