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to standards applicable for annual periods beginning on 1 January 2011 / IAS 16 - PROPERTY, PLANT AND EQUIPMENT / IAS 16.39-1 - Reversals of downward valuations

IAS 16.39-1 - Reversals of downward valuations

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Issue
If an entity chooses to measure certain items of property plant and equipment at revalued amount and an asset that was impaired in prior years, is now revalued upwards, what amount is recognised in profit and loss and other comprehensive income?

Fact pattern
An asset has a cost of CU 750,000, a life of 10 years and an expected residual value of nil. Until year 3 revalued amount was the same as its carrying amount so no revaluation was required. At the end of year 3, when the asset's net carrying amount is CU 525,000, it is written down to CU 350,000. An impairment charge of CU 175,000 is recognised through profit or loss. The entity then depreciates its asset by CU 50,000 per annum to write off the carrying value of CU 350,000 over the remaining 7 years. At the end of year 6, when the assets carrying amount is CU 200,000 the asset is revalued to CU 550,000.

Conclusion
The difference between the net book value on (1) the original historical cost basis and (2) the revalued basis in other comprehensive income in equity. The remainder of the increase due to upward revaluation represents the reversal of an impairment loss and is recognised in profit or loss. There may be practical difficulties for any entity that finds itself in the position of reversing revaluation deficits on depreciating assets. The entity would need to maintain asset registers to maintain the original historical cost for such comparison. Applying this conclusion to the fact pattern:
(in thousands of CU) Revaluation Original historical cost basis 750 (225) 525 (225) 550 300 350 (150) 200 Impaired NBV

January, Year 1 Depreciation, Years 1-3 Net Book Value (NBV), End of year 3 Depreciation, Years 4-6 Net book value, End of year 6

The asset is increased by CU 350,000 (the difference between the revalued amount CU 550,000 and the net book value at the end of year 6 of CU 200,000) An amount of CU 250,000, representing the difference between the net book value on the original historical cost basis (CU 300,000) and the revalued basis (CU 550,000) is recognised in other comprehensive income and accumulated in the revaluation surplus in equity. The remaining CU 100,000, representing the difference between the book value prior to revaluation and the original historical cost basis, is recognised in profit or loss.

Printed 24 Sep 2012

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International Accounting and Auditing / International Financial Reporting Standards / Ernst Young / QAs (Internal Only) / QAs related to standards applicable for annual periods beginning on 1 January 2011 / IAS 16 - PROPERTY, PLANT AND EQUIPMENT / IAS 16.39-1 - Reversals of downward valuations

Reasons for conclusion

Paragraph 39 of IAS 16 Property, Plant and Equipment states: "If an asset's carrying amount is increased as a result of a revaluation, the increase shall be recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the increase shall be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss." Although IAS 16 does not specify whether to refer to the net book value of the asset if the asset had been carried at historical cost, the analogy to IAS 36 Impairment of Assets below is a strong indicator as to the implied accounting treatment. Paragraph 117 of IAS 36 states: "The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior years." Date approved by IFRS Policy Committee: April 2005 Date amended by IFRS Policy Committee: June 2010

Go To Document ID: EY QA IAS 16.39-1 System ID: 200595120~32096 Date: 26 Aug 2010

Printed 24 Sep 2012

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