CFAI text Vol 3, P.462
Revaluation shall be conducted every year (annually) under “Revaluation Model” ? If so, why there is "subsequent accumulated depreciation or amortization ?
Aplha668,
It has been many years since I took this exam, so I don’t have the 2012 curriculum and cannot look up the page. Nevertheless, I hope you will find this helpful. I assume that you are referring to revaluation of long-lived assets (notably Property, Plant and Equipment) under IFRS and not to the fair value model for Investment property.
-
IFRS does not require ANNUAL revaluations. Are you sure the curriculum actually makes that statement? The relevant standard (IAS 16) states that the frequency of revaluation depends upon the changes in fair values of the items being revalued. An asset experiencing significant and volatile changes in fair value requires frequent, i.e. annual revaluation. In other cases it may be ok to revalue only every three to five years (I have seen numerous companies adopt this approach for owner-occupied property with insignificant changes in value).
-
Companies applying the revaluation model still need to compute depreciation/amortization expense which goes to the income statement. A lot of the time accumulated depreciation does not dissapear after a revaluation (irrespective of revaluation frequency). What sometimes happens is that both the gross carrying amount and accumulated depreciation are scaled proportionately, as in the following example:
_ Example: _ Consider a company with an asset that originally cost 150 (gross carrying amount) and has accumulated depreciation of 50. Its net carrying amount is therefore 100. The company decides to switch to the revaluation model and determines that the asset fair value (and thus its new carrying amount in the balance sheet) is 120.
In order to record the increase in value, the asset’s carrying amount needs to go up by 20% (from 100 to 120).
In the notes to the balance sheet (where the company needs to show the breakdown of carrying amount components) you may see that both the gross carrying amount and accumulated depreciation have been scaled by a factor of 1.2 (1 + 20%), giving:
Gross carrying amount (150 x 1.2) = 180 Accumulated dep’n (50 x 1.2) = 60 Net carrying amount = 180 - 60 = 120
The asset is subsequently depreciated over its remaining economic uselful life and any further revaluataion is recorded in a similar manner.
There is or course another way to do this (IFRS allows both ways). Accumulated depreciation may be eliminated against the asset’s gross carrying amount. If this approach is adopted, the revaluation described in the example above would leave the financial statements showing zero accumulated depreciation and a gross carrying amount of 120. I guess this is what you were expecting to find?
Wojtek,
You are very much appreciated ! Your detailed explanation is what I have been looking for.
So, revaluation is somewhat like impairment test, although they are different in nature. Am I right ?