SHM enterprise, a hypothetical company, owns several investment properties on which it earns rental income. It values the properties using the fair value model based on prevailing rental markets. SHM prepares its financial statements according to IFRS. After two years of increases the market softened in 2010 and values decreased. A summary of the properties’ valuations is as follows:
Original cost (acquired in 2008) $100.0 million
Fair value valuation as of December 31, 2008 $102.0 million
Fair value valuation as of December 31, 2009 $110.0 million
Fair value valuation as of December 31, 2010 $98.00 million
What will be the impact of the revaluation on the 2010 financial statements?
A. $12 million charge to net income.
B. $10 million charge to revaluation surplus and €2.0 million charge to net income.
C. $12 million charge to revaluation surplus.
Shouldnt the answer be B?
According to the question bank,A is correct. When using the fair value model of revaluing assets, all increases and decreases in the investment prices affect net income.
Can anyone please explain?
But as far as I remember, I agree with you that the 10 million should be deducted from surplus and 2 million should be reported as loss in income statement due the fact that the asset’s value dropped under the historical cost.