Are these journals correct for IAS16 PPE?

[Mia1982]

Are these journals correct for IAS16 PPE? I don't know if I am understanding how to do it correctly.

Example:

Year 1: Purchase at 1,000,000.00
Year 2: Revaluate to 2,000,000.00
Year 3: Revaluate to 200,000.00
Depreciation = useful life is 5 years

This is how far I got but I don't know if it is correct:

Year 1:
DT Asset @ cost 1,000,000.00 (BS)
CR Bank 1,000,000.00 (BS)
DT Depreciation 200,000.00 (IS) (1,000,000.00 / 5)
CR Accumulated depreciation 200,000.00 (BS)

Year 2:
DT Asset @ cost 1,000,000.00 (BS)
CR Revaluation surplus 1,000,000.00 (BS)
DT Accumulated depreciation 200,000.00 (BS)
CR Revaluation surplus 200,000.00 (BS)
DT Depreciation 500,000.00 (IS) (2,000,000.00 / 4)
CR Accumulated depreciation 500,000.00 (BS)

Year 3:
DT Revaluation surplus 1,200,000.00 (BS)
DT Accumulated depreciation 500,000.00 (BS)
DT Impairment expense 100,000.00 (IS)
CR Asset @ cost 1,800,000.00 (BS)
DT Depreciation 66,666.67 (IS) (200,000.00 / 3)
CR Accumulated depreciation 66,666.67 (BS)

[Andromeda]

Hi Mia1982

The cost can't change nor can depreciation thereon, unless the accounting policy changes.

[Mia1982]

If the accounting policy changes, will the journals be correct?

[Andromeda]

Hi Mia

Forget my answer, I was being facetious.

This is the relevant part of IS16:
Revaluation model–
31

After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period.

32⁠–33

[Deleted]

34

The frequency of revaluations depends upon the changes in fair values of the items of property, plant and equipment being revalued. When the fair value of a revalued asset differs materially from its carrying amount, a further revaluation is required. Some items of property, plant and equipment experience significant and volatile changes in fair value, thus necessitating annual revaluation. Such frequent revaluations are unnecessary for items of property, plant and equipment with only insignificant changes in fair value. Instead, it may be necessary to revalue the item only every three or five years.

35

When an item of property, plant and equipment is revalued, the carrying amount of that asset is adjusted to the revalued amount. At the date of the revaluation, the asset is treated in one of the following ways:

(a)

the gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying amount of the asset. For example, the gross carrying amount may be restated by reference to observable market data or it may be restated proportionately to the change in the carrying amount. The accumulated depreciation at the date of the revaluation is adjusted to equal the difference between the gross carrying amount and the carrying amount of the asset after taking into account accumulated impairment losses; or

(b)

the accumulated depreciation is eliminated against the gross carrying amount of the asset.

The amount of the adjustment of accumulated depreciation forms part of the increase or decrease in carrying amount that is accounted for in accordance with paragraphs 39 and 40.
36

If an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to which that asset belongs shall be revalued.

37

A class of property, plant and equipment is a grouping of assets of a similar nature and use in an entity’s operations. The following are examples of separate classes:

(a)

land;

(b)

land and buildings;

(c)

machinery;

(d)

ships;

(e)

aircraft;

(f)

motor vehicles;

(g)

furniture and fixtures;

(h)

office equipment; and

(i)

bearer plants.

38

The items within a class of property, plant and equipment are revalued simultaneously to avoid selective revaluation of assets and the reporting of amounts in the financial statements that are a mixture of costs and values as at different dates. However, a class of assets may be revalued on a rolling basis provided revaluation of the class of assets is completed within a short period and provided the revaluations are kept up to date.

39

If an asset’s carrying amount is increased as a result of a revaluation, the increase shall be recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the increase shall be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss.

40

If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss. However, the decrease shall be recognised in other comprehensive income to the extent of any credit balance existing in the revaluation surplus in respect of that asset. The decrease recognised in other comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus.

41

The revaluation surplus included in equity in respect of an item of property, plant and equipment may be transferred directly to retained earnings when the asset is derecognised. This may involve transferring the whole of the surplus when the asset is retired or disposed of. However, some of the surplus may be transferred as the asset is used by an entity. In such a case, the amount of the surplus transferred would be the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the asset’s original cost. Transfers from revaluation surplus to retained earnings are not made through profit or loss.

42

The effects of taxes on income, if any, resulting from the revaluation of property, plant and equipment are recognised and disclosed in accordance with IAS 12 Income Taxes.

[Mia1982]

Thank you

[vieome]

IAS 16, or the International Accounting Standard 16, is a standard developed by the International Accounting Standards Board (IASB) that deals with the accounting treatment of Property, Plant, and Equipment (PPE). PPE refers to tangible assets that are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. IAS 16 provides guidance on the recognition, measurement, depreciation, and disclosure of PPE.

Here are key aspects of IAS 16 regarding Property, Plant, and Equipment:

Recognition:
PPE should be recognized as an asset when it is probable that future economic benefits associated with the asset will flow to the entity, and the cost of the asset can be measured reliably.
Initial measurement includes all costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.

Subsequent Measurement:
After initial recognition, an entity can choose between the cost model and the revaluation model for subsequent measurement.
Under the cost model, PPE is carried at cost less accumulated depreciation and impairment losses.
Under the revaluation model, PPE is carried at fair value less subsequent accumulated depreciation and impairment losses.

Depreciation:
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
The choice of the depreciation method (e.g., straight-line, diminishing balance) should be based on the pattern in which the asset's economic benefits are expected to be consumed.

Revaluation:
If the revaluation model is chosen, PPE should be revalued regularly to fair value.
Revaluations should be carried out with sufficient regularity to ensure that the carrying amount does not differ materially from fair value.

Impairment:
An entity should assess at each reporting date whether there is any indication that PPE may be impaired. If such an indication exists, the recoverable amount should be estimated, and impairment losses recognized as necessary.

Derecognition:
When an item of PPE is derecognized, any gain or loss arising from the derecognition should be recognized in profit or loss.

Disclosures:
The standard requires extensive disclosures about PPE, including the measurement basis used, the useful lives or depreciation rates applied, and any restrictions on title.

IAS 16 aims to ensure that entities provide relevant and reliable information about their investment in PPE, facilitating users of financial statements to understand the nature and financial effects of such investments. It is important for entities to carefully apply the principles outlined in IAS 16 to ensure accurate and transparent reporting of their property, plant, and equipment.