COMPANY ACCOUNTING IN AUSTRALIA

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COMPANY ACCOUNTING IN AUSTRALIA 5th editionKen
Leo John Hoggett

• CHAPTER 12
• REVALUATION AND IMPAIRMENT OF NON-CURRENT ASSETS

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Learning objectives

1. To understand principles of AASB 1041
2. To prepare journal entries revaluation
   increments decrements
3. To account for depreciation subsequent to
   revaluation
4. To apply the disclosure requirementsAASB 1041
5. To be able to account for the recoverable amount
   test

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Revaluation Recoverable amount

• AASB 1041
• allows companies to revalue non-current assets to
  their fair values
• AASB 1010
• states that assets cannot be valued at greater
  than their recoverable amount

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AASB 1041

• Applies to non-current assets
• Does not include Inventories which have to be
  valued _at_ the lower of cost or market value.

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AASB 1041 measurement choices

• 2 choices
• cost basis
• or
• fair value basis
• FV current market price
• by class of assets

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Net revaluation increment- example

• An entity acquires land for 75 000. Asset is
  revalued to 100 000. Tax rate is 30
• Land Dr 25 000 Asset Revaln Reserve Cr 25
  000
• Asset Revaln Reserve Dr 7 500 Deferred Tax
  Liability Cr 7 500
• NB for increment the ARR must be the after tax
  adjustment

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Revaluation Increment depreciable assets

• Entity has depreciable asset at carrying amount
  of 100 000 cost 120 000, accumulated
  depreciation 20 000. Revalue to 110 000. Tax
  base is 100 000.
• Accum. Depreciation 20 000
• Asset
  20 000
• Asset 10
  000
• ARR
  10 000
• ARR 3
  000
• Deferrd Tax Liability
  3 000

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Net revaluation decrement

• Recognise as expense in PL
• Asset carried at 100 000, cost 120 000.
  Revalued to 90 000.
• Accum. Depreciation 20 000
• Asset
  20 000
• Expense 10 000
• Asset
  10 000

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Revaluation decrement tax-effect

• No tax-effect entry necessary
• - not adjusted via other equity account
• - tax-effect worksheet will adjust for
  difference between tax base and carrying amount

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Net decrement reverses ? prior revaluation
increment

• Firstly adjust against existing Revaluation
  Reserve consider tax-effect
• Asset has carrying amount of 50, previously
  revalued upwards by 10, now revalued down to
  35.
• Asset Revaln Reserve 7
• Deferred Tax Liability 3
• Asset
  10
• Expense 5
  
• Asset 5

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Revaluation increment reverses prior decrement ?

• Asset carried at 100, accumulated depreciation
  of 20, revalued to 130. Previously revalued
  downwards by 10.
• Accum. Depn 20
• Asset 20
• Asset 10
• Revenue 10
• Asset 20
• ARR 14
• Deferred Tax Liability 6

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Depreciation of revalued assets ?

• Both AASB 1041 and AASB 1021 require the
  calculation of depreciation as a process of
  allocation.
• At 1/7/02, asset revalued to 100. Useful life is
  5 years..
• Depreciation is 20
• However company will need to look at the Fair
  Value _at_ end of the year may need to revalue
  again.

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Disclosure requirements where assets at fair
value ?

• AASB 1041, paragraph 9
• Method used to determine fair values
• Statement re independent valuation
• If index of replacement costs used
• Balance of revaluation reserve

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Disclosure requirements ?

• AASB 1041, paragraph 4.1
• Whether cost or fair value is used, show for each
  class of assets a reconciliation of carrying
  amount at beginning and end of period, showing
• Additions
• Disposals
• Acquisitions via acquiring other entities
• net revaluation increment
• recoverable amount write-downs
• reversals of recoverable amount write-downs
• depreciation expense
• other movements
• -

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Disclosure requirements ?

• AASB 1018
• Net credit or debit to asset revaluation reserve
• Net increment/decrement for each class of
  non-current assets
• AASB 1040
• Total reserves
• For each reserve
• description of nature and purpose
• amount at beginning of period
• nature and amount of each increase/decrease
• amount as at reporting date

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The cost method ?

• Asset recorded at cost of acquisition
• Depreciated as per AASB 1021
• Recoverable amount test applied

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AASB 1010 ?

• AASB 1010 Recoverable Amount of Non-Current
  Assets, issued 1999
• Does NOT apply to
• assets measured at fair value or net market value
• inventories
• not-for-profit entities

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The recoverable amount test?

• Compare carrying amounts of assets with
  recoverable amounts
• Recoverable amount is the net amount expected to
  be recovered through cash inflows/outflows
  arising from continued use and subsequent disposal

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The recoverable amount test ?

• If
• recoverable amount lt carrying amount
• - write down the asset
• - recognise an expense
• - write-back accumulated depreciation

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The recoverable amount test ?

• An asset is carried at 12 000 - cost of 20 000
  and accumulated depreciation of 8000.
  Recoverable amount estimated to be 10 000.
• Accum. Depreciation Dr 8 000
• Asset Cr 8 000
• Expense Dr
  2 000
• Asset Cr
  2 000
• Depreciation now based on 10 000

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Disclosures - AASB 1010 ?

• For assets written down in the current period,
  for each class of assets
• - carrying amount
• - amount of write-down
• - assumptions made in determining recoverable
  amount
• Assets measured at recoverable amount, less
  depreciation
• Whether cash flows have been discounted in
  determining recoverable amount

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Impairment test ?

• ED 99 Impairment of Assets,
• issued December 1999. ltltSince
• Withdrawngtgt
• Expect impairment standard to replace AASB 1010
  Recoverable amount in the future

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Tutorial Questions

• Exercise 12.1
• Exercise 12.2
• Exercise 12.3