FAC3702 IAS 16 - PPE Revaluation model
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FAC3702 IAS 16 - PPERevaluation model
Measurement after RecognitionAn entity shall choose, after the initial recognition of a PPE item, either
• the Cost Model (Calculation of CA = Cost price Less accumulated depreciation Less accumulated impairment losses)OR
• the Revaluation Model(Calculation of CA= Net replacement value on date of revaluation Less accumulated depreciation Less accumulated impairment losses)
Its accounting policy and applies to an entire class of property, plant and equipment (Buildings, land etc.)
Determining the Replacement Value
• Gross replacement value is the replacement cost (market value) of a similar, new asset.
• Net replacement value is the equivalent fair market value of a similar asset of the same age and/or condition.
When to Revalue
• IAS 16 does not specify the date that the revaluation of the asset should take place.
• If the revaluation is performed at the end of the financial year, the revalued amount is worked back to the beginning of the year in order to calculate the revaluation surplus.
• Depreciation for the current year is based on the latest recalculated, revalued amount.
• Stipulated in the accounting policy of the company.
Gross Replacement Value (GRV)STEP 1:Determination of replacement value - the gross replacement value is regarded as the “cost price” of a similar, new asset on acquisition date.
STEP 2:Restate GRV to net replacement value (NRV) on revaluation date.
STEP 3:Calculate the revaluation surplus = (Revalued amount – Carrying amount of asset on revaluation date)
STEP 4:Disclose the revaluation surplus in the PPE note (if required)
GRV- Example
Manufacturing building
ABC Ltd owns a property located in Gauteng which is used for the manufacturing of its products. The propertywas purchased on 1 October 2014 for R6 000 000 (land: R2 500 000; building: R3 500 000) and was availablefor use, as intended by management, on that date. On that date, the useful life of the building was estimated tobe 35 years. A residual value of R700 000 was allocated to the building.
On 31 December 2017 the property was revalued for the first time by an independent sworn appraiser, whoholds a recognised and relevant professional qualification and who has recent experience in the location andcategory of the property being valued. The gross replacement value of the property on this date wasestimated to be R6 650 000 (land: R2 750 000; building: R3 900 000). These values were determined byreference to current market evidence. The residual value and remaining useful life of the property remainedunchanged. No decision has been made by the company to sell this property.
Year end is 31 December 2017.
Details on a TimelineManufacturing building
27 months 12 months
Cost price ‐ Land 2 500 000 Gross replacement value ‐ Land 2 750 000
Cost price ‐ Building 3 500 000 Gross replacement value ‐ Building 3 900 000 Residual value 700 000
Depreciable amount 2 800 000 Financial year Months2014 01‐Oct‐14 31‐Dec‐14 3
Useful life 35 years 2015 01‐Jan‐15 31‐Dec‐15 12Useful life 420 months 2016 01‐Jan‐16 31‐Dec‐16 12
Total months 27
Period
Useful life = 420 Useful life = 393 Useful life = 381
01 October 2014 01 January 2017 31 December 2017
Date purchased and ready for use
Beginning of current financial
End of current financial year
Restate GRV to NRV
Use the following formula:[(GRV at revaluation – residual value) / Total useful life x useful life at beginning of current financial year] + residual value
From the example this will be:= [(3 900 000 – 700 000) / 420 months x 393 months] + 700 000= [(3 200 000) / 420 months x 393 months] + 700 000
Therefore NRV at 1 January 2017 = R3 694 286
Revaluation Surplus at the beginning of Current Financial Year
Building cost price 3 500 000Residual value (700 000)Depreciable amount 2 800 000
Accumulated depreciation beginning of current financial year:2 800 000 / 420 months useful life x 27 months in use = 180 000
Building cost price 3 500 000Accumulated depreciation (180 000)Carrying amount beginning of year 3 320 000
Revaluation surplus building = Net replacement value beginning of year – Carrying amount beginning of year= 3 694 286 – 3 320 000 = R 374 286 revaluation surplus
Revaluation surplus land = 2 750 000 - 2 500 000 = R250 000 revaluation surplus
Net Replacement Value - NRVSTEP 1:Determination of replacement value - the net replacement value is the equivalent fair market value of a similar asset of the same age and/or condition.
STEP 2:Restate net replacement value at the end of the financial year to net replacement value at the beginning of the financial year.
STEP 3:Calculate the revaluation surplus that must be recognised in OCI= (Revalued amount – Carrying amount of asset on revaluation date)
STEP 4:Disclose the revaluation surplus in the PPE note (if disclosure is required)
NRV - ExampleManufacturing building
ABC Ltd owns a property located in Gauteng which is used for the manufacturing of its products. The propertywas purchased on 1 November 2015 for R3 400 000 (land: R1 450 000; building: R1 950 000) and wasavailable for use, as intended by management, on that date. On that date, the useful life of the building wasestimated to be 30 years. A residual value of R480 000 was allocated to the building.
On 30 June 2017 the property was revalued for the first time by an independent sworn appraiser, who holds arecognised and relevant professional qualification and who has recent experience in the location and categoryof the property being valued. The net replacement value of the property on this date was estimated to beR3 800 000 (land: R1 700 000; building: R2 100 000). These values were determined by reference to currentmarket evidence. The residual value and remaining useful life of the property remained unchanged. Nodecision has been made by the company to sell this property.
Year end is 30 June 2017.
Details on a TimelineManufacturing building
8 months 12 months
Cost price ‐ Land 1 450 000 Net replacement value ‐ Land 1 700 000
Cost price ‐ Building 1 950 000 Net replacement value ‐ Building 2 100 000 Residual value 480 000 Depreciable amount 1 470 000 Year Months
2015 01‐Nov‐15 31‐Dec‐15 2Useful life 30 years 2016 01‐Jan‐16 30‐Jun‐16 6Useful life 360 months Total months 8
Date purchased and ready for use
Beginning of current financial
End of current financial year
Period
Useful life = 360 Useful life = 352 Useful life = 340
01 November 2015 01 July 2016 30 June 2017
Restate the NRV at year-end to beginning of the year
Use the following formula:[(NRV at revaluation – residual value) / useful life at end of financial year x useful life at beginning of current financial year] + residual value
From the example this will be:= [(2 100 000 – 480 000) / 340 months x 352 months] + 480 000= [(1 620 000) / 340 months x 352 months] + 480 000
Therefore the NRV at 1 July 2016 = R2 157 176
Revaluation Surplus at the beginning of Current Financial Year
Building cost price 1 950 000Residual value (480 000)Depreciable amount 1 470 000
Accumulated depreciation beginning of current financial year:1 470 000 / 420 months useful life x 8 months in use = 32 667
Building cost price 1 950 000Accumulated depreciation (32 667)Carrying amount beginning of year 1 917 333
Revaluation surplus building = Net replacement value beginning of year – Carrying amount beginning of year= 2 157 176 – 1 917 333 = R239 843 revaluation surplus
Revaluation surplus land = 1 700 000 – 1 450 000 = R250 000 revaluation surplus
Contact us
• The course telephone number: 012 429 4268
• Please send all e‐mails to: FAC3702‐18‐[email protected] (Semester 1) orFAC3702‐18‐[email protected] (Semester 2)
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