Chapter 5

Assets 1
Reporting losses and gains on revaluation

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 Measurement Subsequent to
Initial Recognition

• IAS 16 permits two accounting models:

Cost Model. The asset is carried at cost less
accumulated depreciation and impairment. [IAS
16.30]
Revaluation Model. The asset is carried at a
revalued amount, being its fair value at the date of
revaluation less subsequent depreciation and
impairment, provided that fair value can be
measured reliably. [IAS 16.31]

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 The Revaluation Model

• Under the revaluation model, revaluations

should be carried out regularly, so that the
carrying amount of an asset does not differ
materially from its fair value at the balance
sheet date. [IAS 16.31]
• If an item is revalued, the entire class of
assets to which that asset belongs should be
revalued. [IAS 16.36]
• Revalued assets are depreciated in the same
way as under the cost model (see below).
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• If a revaluation results in an increase in value, it should be
credited to other comprehensive income and accumulated in
equity under the heading "revaluation surplus" unless it
represents the reversal of a revaluation decrease of the same
asset previously ` as an expense, in which case it should be
recognized as income. [IAS 16.39]
• A decrease arising as a result of a revaluation should be
recognized as an expense to the extent that it exceeds any
amount previously credited to the revaluation surplus relating
to the same asset. [IAS 16.40]
• When a revalued asset is disposed of, any revaluation surplus
may be transferred directly to retained earnings, or it may be
left in equity under the heading revaluation surplus. The
transfer to retained earnings should not be made through the
income statement (that is, no "recycling" through profit or
loss). [IAS 16.41]

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 Key Definitions [IAS 36.6]
• Impairment: an asset is impaired when its carrying amount
exceeds its recoverable amount
• Carrying amount: the amount at which an asset is ` in the balance
sheet after deducting accumulated depreciation and accumulated
impairment losses
• Recoverable amount: the higher of an asset's fair value less costs
to sell (sometimes called net selling price) and its value in use
• Fair value: the amount obtainable from the sale of an asset in an
arm's length transaction between knowledgeable, willing parties
• Value in use: the discounted present value of the future cash flows
expected to arise from:
the continuing use of an asset, and from
its disposal at the end of its useful life

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 Recognition of an Impairment
Loss
• An impairment loss should be recognized
whenever recoverable amount is below carrying
amount. [IAS 36.59]
• The impairment loss is an expense in the income
statement (unless it relates to a revalued asset
where the value changes are recognized directly in
equity). [IAS 36.60]
• Adjust depreciation for future periods. [IAS 36.63]

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Expected future net cash flows less impairment
than carrying amount ?

Assets held for Assets held for

use disposal
No
impairment
1- impairment loss : 1- impairment loss :
excess of carrying excess of carrying
amount over fair amount over (fair value
value. less cost of disposal)
2- No depreciation taken
2- Depreciate on new
3- Restoration of
cost basis . impairment loss
3- Restoration of loss permitted .
not permitted .
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 Recoverability of the Carrying
Amount

IAS 36 requires impairment testing and, if

necessary, recognition for property, plant,
and equipment. An item of property, plant,
or equipment shall not be carried at more
than recoverable amount. Recoverable
amount is the higher of an asset's fair value
less costs to sell and its value in use.

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 Determining Recoverable
Amount

• If fair value less costs to sell or value in use is

more than carrying amount, it is not necessary to
calculate the other amount. The asset is not
impaired. [IAS 36.19]
• If fair value less costs to sell cannot be
determined, then recoverable amount is value in
use. [IAS 36.20]
• For assets to be disposed of, recoverable amount
is fair value less costs to sell. [IAS 36.21]

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 Fair value

The amount for which an asset could be

exchanged between knowledge, willing
parties in an arm’s length transaction.
Fair value is the market value of an asset in a
good market, that is one where there are
willing buyers and sellers, where the parties
are knowledge and where there are no forced
sales.
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 Value in Use
• The calculation of value in use should reflect the following
elements: [IAS 36.30]
• an estimate of the future cash flows the entity expects to
derive from the asset
• expectations about possible variations in the amount or
timing of those future cash flows
• the time value of money, represented by the current market
risk-free rate of interest
• the price for bearing the uncertainty inherent in the asset
• other factors, such as illiquidity, that market participants
would reflect in pricing the future cash flows the entity
expects to derive from the asset
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 Value to the business

The present value of the future cash flows obtainable as a result

of the assets continued use, including those resulting from its
ultimate disposal. The higher of the net realizable and value in
use is the assets recoverable amount. So when a company
exercise its option to show assets at current value, rather than
on the basis of historical cost, the value to the business will
usually be its replacement cost, or to be more precise in the case
of a fixed asset, the replacement cost of that portion of the
assets that has not been consumed.

Value to the business = lower of : Replacement cost

Recoverable amount

Recoverable amount = higher of ; Value in use 12

Net realizable value
 Reporting losses and gains on
revaluation
• Revaluation gains should in general be recognized in
the STRGL other than to the extent that gain reverses
revaluation losses on the same asset that were
recognized in the profit and loss account
• The exposure draft’s proposals on the treatment of
revaluation losses is that :-
All revaluation losses that exceed existing revaluation
surpluses should be charged to the profit and loss
account.
Losses that are reversals of previously recognized
gains should be shown in the STRGL.
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 Reporting losses and gains on
disposal
• The profit or loss on the disposal of a tangible fixed asset
should be accounted for in the profit and loss account of
the period in which the disposal occurs as the difference
between the disposal proceeds and the carrying amount,
whether carried at historical cost.
• If the entity had, at some stage in the past, revalued the
asset the revaluation gain would not have passed through
the profit and loss account but would instead have been
recorded in the STRGL. But if the asset had not been
revalued the whole of the gain goes through the profit and
loss account.

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 References
Advanced financial accounting.
( Richard Lewis & David Pendrill)
Intermediate accounting.
( Kieso)
IAS 16.
IAS 36.

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 • Thank you for your kind attention and I
hope that you will be benefited from my
presentation of this project

• Prepared by :
Marwa Mahmoud
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