1. Revaluation of non-current assets
Chapter 5
Revaluation of non-current assets

2. Objectives
Understand how and when to revalue a non-current asset in accordance with FRS-3.
Understand the difference in accounting treatments for upward revaluations to ‘fair value’, as opposed to downward revaluations to ‘recoverable amount’.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin

3. Objectives (cont.)
Understand how to account for revaluations that act to reverse previous revaluation increments and decrements.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin

4. Objectives (cont.)
Understand how to account for accumulated depreciation when a non-current depreciable asset is revalued, and appreciate that, subsequent to revaluation, new depreciation charges will be based on the revalued amount of the non-current asset.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin

5. Objectives (cont.)
Know how the profit on disposal of a revalued non-current asset is determined and understand how asset revaluations can affect an organisation’s profits due to changes in depreciation expenses and in final profits or losses on the sale of the revalued assets.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin

6. Objectives (cont.)
Be able to explain what might motivate an organisation to elect to, or alternatively, not elect to revalue its non-current assets upwards.
Know the disclosure requirements contained in FRS-3.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin

7. Introduction
Within New Zealand, non-current assets may be revalued upwards or downwards to reflect the fair value of the assets.
Revaluation is the act of recognising a reassessment of values of non-current assets as at a particular date.
Asset must not exceed its recoverable amount following revaluation.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin

8. Carrying amount in excess of recoverable amount
When carrying amount exceeds recoverable amount, write-down to recoverable amount is required.
Governed by FRS-3.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin

9. Measuring at cost or fair value
When an item meets asset recognition criteria, each class of non-current asset is measured at cost.
Entity can elect to change measurement basis to fair value.
Entire class of asset must be recorded on the same basis.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin

10. Measuring at cost or fair value (cont.)
Non-current assets must be written down to recoverable amount when carrying amount exceeds recoverable amount.
Write-downs not considered to be revaluations.
Does not require write-down of entire class of assets in this case.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin

11. Definition of recoverable amount
Recoverable amount, in relation to an asset, means the net greater of net market value and value in use.
Net market value is the fair value less the costs of disposal.
Value in use is determined by discounting the expected future cash flows obtained from an asset’s continuing use and ultimate disposal at an appropriate discount rate.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin

12. Use of fair value Any revaluation must be to ‘fair value’.
Governed by FRS-3.
Before issue of FRS-3, no specific requirement to use fair values
previously revalued amount was not to exceed recoverable amount.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin

13. Definition of fair value
Defined as the amount for which an asset can be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
Fair value determined on the basis of a going concern.
If active or liquid market then market value equals fair value.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin

14. Valuation to be kept up to date
Once it is decided to revalue, valuations must be kept up to date.
If frequent material changes in value, then revaluation could be required each accounting period.
If no material changes, revaluation every three years would be sufficient.
Maximum interval between revaluations is five years.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin

15. Revaluation increments
General procedure
Dr Asset
Cr Asset revaluation reserve
Asset revaluation reserve is part of equity.
Directors may approve cash distributions to shareholders, provided that, immediately after distribution, the company satisfies the solvency test.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin

16. Treatment of accumulated depreciation upon revaluation
If the revalued asset is a depreciable asset, any balance of accumulated depreciation is credited to the gross carrying amount of the item.
Journal entry:
Dr Accumulated depreciation
Cr Asset
Subsequent depreciation based on revalued amount.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin

17. Revaluation decrements and deficits
In line with concept of prudence, decrements go to statement of financial performance.
Journal entry:
Dr Loss on revaluation asset
Cr Asset
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin

18. Reversal of revaluation decrements and increments
With respect to a class of assets, reversals of previous revaluations should, as far as possible, be accounted for by entries that are the reverse of those entries bringing the previous revaluations to account.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin

19. Reversal of revaluation increments
Where revaluation decrement reverses a previous increment it will be debited to the asset revaluation reserve account and not to the statement of financial performance.
Any excess over the previous revaluation increment is debited to the statement of financial performance.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin

20. Reversal of revaluation decrements
Where revaluation increment reverses a previous revaluation decrement, it is credited to the statement of financial performance.
Any excess over the previous revaluation decrement would be credited to the asset revaluation reserve.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin

21. Accounting for profit or loss on disposal of a revalued non-current asset
Profit or loss on disposal of revalued item of PPE is measured as the difference between the carrying amount of the revalued asset at the time of disposal and net proceeds (if any) from disposal.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin

22. Asset revaluation reserve account pertaining to disposed asset
No guidance on how to treat this in accounting standards.
Options:
leave the balance as is;
transfer the balance to another reserve (asset realisation reserve or capital profits reserve); or
transfer balance to retained earnings.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin

23. Consideration of present values
Recoverable amount defined as the greater of net market value and value in use.
Difficulties exist with the definition of recoverable amounts.
No necessity for net market value to be discounted as it is already expressed at current value.
Is the requirement that expected future cash flows be discounted when determining value in use logical?
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin

24. Offsetting increments/ decrements within a class of assets
FRS-3 requires revaluation increments and decrements to be offset against one another within a class of non-current assets.
Increments and decrements are not to be offset in respect of different classes of non-current assets.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin

25. Change in measurement base
Where a change in measurement base for a class of PPE has been made, this must be accounted for as a change in accounting policy.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin

26. Economic consequences of asset revaluations
If contracts in place are tied to reported profits (debt or management compensation), management may have incentive not to revalue.
However, if assets are increased, the revaluation may loosen constraints such as debt/assets restrictions.
Firms subject to political scrutiny may be more likely to undertake upward revaluation resulting in a reduction in profits.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin

27. Disclosure requirements
Detailed and contained in FRS-3
Where a class of PPE is stated at revalued amount, the following must be disclosed:
revaluation surplus
intervals at which valuations take place
dates and amounts of valuations supporting recognised valuations
names and qualifications of valuers
bases of valuations
any special assumptions or limiting conditions
where the cyclical basis of valuation adopted, that fact and an explanation of the basis used.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin

28. Disclosure requirements (cont.)
Where a class of PPE is no longer revalued because of a change in accounting policy, the following must be disclosed:
the fact that the class of items is no longer accounted for under the modified historical cost system; and
the basis upon which the class of item is now accounted for.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin

29. Disclosure requirements (cont.)
Where items of PPE are revalued, the following must be disclosed:
as a separate component of total recognised revenues and expenses, the sum of all revaluation increments and decrements recognised in the SOME during the period
the sum of all revaluation increments and decrements recognised in the statement of financial performance during the period.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin

30. Disclosure requirements (cont.)
Where the measurement base for any class of PPE has been changed, the following must be disclosed:
the change in accounting policy in accordance with FRS-1
whether the measurement base has been changed previously and, if so, when.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin