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    Reversal of Revaluation

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    Herrah Joyce Salinas
    Under the revaluation model of IFRS, assets can be revalued upwards or downwards to reflect changes in fair value. For Axe Ltd., when the building was revalued upwards to $190,000 in 2010, a journal entry credited Revaluation Surplus for $20,000. Depreciation is then based on the revalued amount. If the building is later revalued downwards, the loss is written off against any existing Revaluation Surplus balance first before recognizing an impairment loss.

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    Reversal of Revaluation

    Uploaded by

    Herrah Joyce Salinas
    57 views3 pages
    Under the revaluation model of IFRS, assets can be revalued upwards or downwards to reflect changes in fair value. For Axe Ltd., when the building was revalued upwards to $190,000 in 2010, a journal entry credited Revaluation Surplus for $20,000. Depreciation is then based on the revalued amount. If the building is later revalued downwards, the loss is written off against any existing Revaluation Surplus balance first before recognizing an impairment loss.

    Original Title

    REVERSAL OF REVALUATION

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    Under the revaluation model of IFRS, assets can be revalued upwards or downwards to reflect changes in fair value. For Axe Ltd., when the building was revalued upwards to $190,000 in 2010, a journal entry credited Revaluation Surplus for $20,000. Depreciation is then based on the revalued amount. If the building is later revalued downwards, the loss is written off against any existing Revaluation Surplus balance first before recognizing an impairment loss.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    57 views3 pages

    Reversal of Revaluation

    Uploaded by

    Herrah Joyce Salinas
    Under the revaluation model of IFRS, assets can be revalued upwards or downwards to reflect changes in fair value. For Axe Ltd., when the building was revalued upwards to $190,000 in 2010, a journal entry credited Revaluation Surplus for $20,000. Depreciation is then based on the revalued amount. If the building is later revalued downwards, the loss is written off against any existing Revaluation Surplus balance first before recognizing an impairment loss.

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    © All Rights Reserved
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    of 3

    Example:

    Axe Ltd. purchased a building worth $200,000 on January 1, 2008. It records the
    building using the following journal entry.

    Equipment 200,000
    Cash 200,000
    The building has a useful life of 20 years and the company uses straight-line
    depreciation. Yearly depreciation is hence $200,000/20 or $10,000. Accumulated
    depreciation as at December 31, 2010 is $10,000×3 or $30,000 and the carrying
    amount is $200,000 minus $30,000 which equals $170,000.

    We see that the building remains at its historical cost and is periodically
    depreciated with no other upward adjustment to value.

    Revaluation Model under IFRS

    In revaluation model, an asset is initially recorded at cost but subsequently its


    carrying amount is increased to account for any appreciation in value. The
    difference between the cost model and the revaluation model is that the
    revaluation model allows both downward and upward adjustment in value of an
    asset while cost model allows only downward adjustment due to impairment loss.

    The required journal entries are explained in the example below.

    Example:

    Consider the example of Axe Ltd. as quoted in case of cost model. Assume on
    December 31, 2010 the company intends to switch to revaluation model and
    carries out a revaluation exercise which estimates the fair value of the building to
    be $190,000 as at December 31, 2010. The carrying amount at the date is
    $170,000 and revalued amount is $190,000 so an upward adjustment of $20,000
    is required to building account. It is recorded through the following journal entry:

    Building 20,000
    Revaluation
    20,000
    Surplus
    Revaluation Surplus
    Upward revaluation is not considered a normal gain and is not recorded in
    income statement rather it is directly credited to a shareholders' equity account
    called revaluation surplus. Revaluation surplus holds all the upward revaluations
    of a company's assets until those assets are disposed of.

    Depreciation After Revaluation

    Depreciation in periods after revaluation is based on the revalued amount. In


    case of Axe Ltd. depreciation for 2011 shall be the new carrying amount divided
    by the remaining useful life or $190,000/17 which equals $11,176.

    Reversal of Revaluation

    If a revalued asset is subsequently valued down due to impairment, the loss is


    first written off against any balance available in the revaluation surplus and if the
    loss exceeds the revaluation surplus balance of the same asset the difference is
    charged to income statement as impairment loss.

    Example:

    Suppose on December 31, 2012 Axe Ltd. revalues the building again to find out
    that the fair value should be $160,000. Carrying amount as at December 31, 2012
    is $190,000 minus 2 years depreciation of $22,352 which amounts to $167,648.

    The carrying amount exceeds the fair value by $7,648 so the account balance
    should be reduced by that amount. We already have a balance of $20,000 in the
    revaluation surplus account related to the same building, so no impairment loss
    shall go to income statement. The journal entry would be:

    Revaluation Surplus 7,648


    Building
    7,648
    Account
    Had the fair value been $140,000 the excess of carrying amount over fair value
    would have been $27,648. In that situation the following journal entry would have
    been required.

    20,00
    Revaluation Surplus
    0
    Impairment Losses 7,648
    Building 20,00
    0
    Accumulate
    d
    7,648
    Impairment
    Losses

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