Revaluation model IAS 16 - PPE FAC3702 Measurement after - PDF document

Revaluation model IAS 16 - PPE FAC3702

Measurement after Recognition An entity shall choose, after the initial recognition of a PPE item, either • the Cost Model (Calculation of CA = Cost price Less accumulated depreciation Less accumulated impairment losses) OR • the Revaluation Model (Calculation of CA= Net replacement value on date of revaluation Less accumulated depreciation Less accumulated impairment losses) Its accounting policy and applies to an entire class of property, plant and equipment (Buildings, land etc.)

Determining the Replacement Value • Gross replacement value is the replacement cost (market value) of a similar, new asset. • Net replacement value is the equivalent fair market value of a similar asset of the same age and/or condition.

When to Revalue • IAS 16 does not specify the date that the revaluation of the asset should take place. • If the revaluation is performed at the end of the financial year, the revalued amount is worked back to the beginning of the year in order to calculate the revaluation surplus. • Depreciation for the current year is based on the latest recalculated, revalued amount. • Stipulated in the accounting policy of the company.

Gross Replacement Value (GRV) STEP 1: Determination of replacement value - the gross replacement value is regarded as the “cost price” of a similar, new asset on acquisition date. STEP 2: Restate GRV to net replacement value (NRV) on revaluation date. STEP 3: Calculate the revaluation surplus = (Revalued amount – Carrying amount of asset on revaluation date) STEP 4: Disclose the revaluation surplus in the PPE note (if required)

GRV- Example Manufacturing building ABC Ltd owns a property located in Gauteng which is used for the manufacturing of its products. The property was purchased on 1 October 2014 for R6 000 000 (land: R2 500 000; building: R3 500 000) and was available for use, as intended by management, on that date. On that date, the useful life of the building was estimated to be 35 years. A residual value of R700 000 was allocated to the building. On 31 December 2017 the property was revalued for the first time by an independent sworn appraiser, who holds a recognised and relevant professional qualification and who has recent experience in the location and category of the property being valued. The gross replacement value of the property on this date was estimated to be R6 650 000 (land: R2 750 000; building: R3 900 000). These values were determined by reference to current market evidence. The residual value and remaining useful life of the property remained unchanged. No decision has been made by the company to sell this property. Year end is 31 December 2017 .

Details on a Timeline Manufacturing building Useful life = 420 Useful life = 393 Useful life = 381 01 October 2014 01 January 2017 31 December 2017 Date purchased and Beginning of End of current ready for use current financial financial year 27 months 12 months Cost price ‐ Land 2 500 000 Gross replacement value ‐ Land 2 750 000 Cost price ‐ Building 3 500 000 Gross replacement value ‐ Building 3 900 000 Residual value 700 000 Financial year Depreciable amount 2 800 000 Period Months 2014 01 ‐ Oct ‐ 14 31 ‐ Dec ‐ 14 3 Useful life 35 years 2015 01 ‐ Jan ‐ 15 31 ‐ Dec ‐ 15 12 Useful life 420 months 2016 01 ‐ Jan ‐ 16 31 ‐ Dec ‐ 16 12 Total months 27

Restate GRV to NRV Use the following formula: [(GRV at revaluation – residual value) / Total useful life x useful life at beginning of current financial year] + residual value From the example this will be: = [(3 900 000 – 700 000) / 420 months x 393 months] + 700 000 = [(3 200 000) / 420 months x 393 months] + 700 000 Therefore NRV at 1 January 2017 = R3 694 286

Revaluation Surplus at the beginning of Current Financial Year Building cost price 3 500 000 Residual value (700 000) Depreciable amount 2 800 000 Accumulated depreciation beginning of current financial year: 2 800 000 / 420 months useful life x 27 months in use = 180 000 Building cost price 3 500 000 Accumulated depreciation (180 000) Carrying amount beginning of year 3 320 000 Revaluation surplus building = Net replacement value beginning of year – Carrying amount beginning of year = 3 694 286 – 3 320 000 = R 374 286 revaluation surplus Revaluation surplus land = 2 750 000 - 2 500 000 = R250 000 revaluation surplus

Net Replacement Value - NRV STEP 1: Determination of replacement value - the net replacement value is the equivalent fair market value of a similar asset of the same age and/or condition. STEP 2: Restate net replacement value at the end of the financial year to net replacement value at the beginning of the financial year. STEP 3: Calculate the revaluation surplus that must be recognised in OCI= (Revalued amount – Carrying amount of asset on revaluation date) STEP 4: Disclose the revaluation surplus in the PPE note (if disclosure is required)

NRV - Example Manufacturing building ABC Ltd owns a property located in Gauteng which is used for the manufacturing of its products. The property was purchased on 1 November 2015 for R3 400 000 (land: R1 450 000; building: R1 950 000) and was available for use, as intended by management, on that date. On that date, the useful life of the building was estimated to be 30 years . A residual value of R480 000 was allocated to the building. On 30 June 2017 the property was revalued for the first time by an independent sworn appraiser, who holds a recognised and relevant professional qualification and who has recent experience in the location and category of the property being valued. The net replacement value of the property on this date was estimated to be R3 800 000 (land: R1 700 000; building: R2 100 000). These values were determined by reference to current market evidence. The residual value and remaining useful life of the property remained unchanged. No decision has been made by the company to sell this property. Year end is 30 June 2017 .

Details on a Timeline Manufacturing building Useful life = 360 Useful life = 352 Useful life = 340 01 November 2015 01 July 2016 30 June 2017 Date purchased and Beginning of End of current ready for use current financial financial year 8 months 12 months Cost price ‐ Land 1 450 000 Net replacement value ‐ Land 1 700 000 Cost price ‐ Building 1 950 000 Net replacement value ‐ Building 2 100 000 Residual value 480 000 Year Depreciable amount 1 470 000 Period Months 2015 01 ‐ Nov ‐ 15 31 ‐ Dec ‐ 15 2 Useful life 30 years 2016 01 ‐ Jan ‐ 16 30 ‐ Jun ‐ 16 6 Useful life 360 months Total months 8

Restate the NRV at year-end to beginning of the year Use the following formula: [(NRV at revaluation – residual value) / useful life at end of financial year x useful life at beginning of current financial year] + residual value From the example this will be: = [(2 100 000 – 480 000) / 340 months x 352 months] + 480 000 = [(1 620 000) / 340 months x 352 months] + 480 000 Therefore the NRV at 1 July 2016 = R2 157 176

Revaluation Surplus at the beginning of Current Financial Year Building cost price 1 950 000 Residual value (480 000) Depreciable amount 1 470 000 Accumulated depreciation beginning of current financial year: 1 470 000 / 420 months useful life x 8 months in use = 32 667 Building cost price 1 950 000 Accumulated depreciation (32 667) Carrying amount beginning of year 1 917 333 Revaluation surplus building = Net replacement value beginning of year – Carrying amount beginning of year = 2 157 176 – 1 917 333 = R239 843 revaluation surplus Revaluation surplus land = 1 700 000 – 1 450 000 = R250 000 revaluation surplus

Contact us • The course telephone number: 012 429 4268 • Please send all e ‐ mails to: FAC3702 ‐ 18 ‐ S1@unisa.ac.za (Semester 1) or FAC3702 ‐ 18 ‐ S2@unisa.ac.za (Semester 2)