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17.2.2.2 Replacement of a major components and periodic replacement
17.2.2.3 Separation of land and buildings
17.2.3 Measurement at initial recognition
17.2.3.1 Extract from FRS 102 – Section 17.9-17.13
17.2.3.3 Directly attributable costs
17.2.3.4 Not directly attributable costs
17.2.3.5 Decommissioning costs
17.2.3.6 Self-constructed assets
17.2.3.7 Cessation of capitalisation
17.2.3.9 Deferred payment terms – measurement of cost
17.2.4.1 Extract from FRS 102 – Section 17.14
17.2.5 Measurement after Initial Recognition
17.2.5.1 Extract from FRC – FRS 102 – Section 17.15-17.15F
17.2.5.2.2.1 Frequency of revaluations
17.2.5.2.2.2 Meaning of fair value
17.2.5.2.2.3 Accounting for revaluation surpluses/deficits
17.2.5.2.2.4 Treatment of depreciation on upward revaluations
17.2.6 Depreciation, residual value and useful lives
17.2.6.0 Extract from FRS 102 Sections 17.16 to 17.23
17.2.6.1.2 Depreciation and useful economic life
17.2.6.1.4 Change in residual value, depreciation rate or useful economic life – change in estimate
17.2.6.1.5 Non-depreciable assets
17.2.6.1.6 Commencement and cessation of depreciation
17.2.6.1.7 Depreciation methods
17.2.6.1.5.1: Straight line method
17.2.6.1.5.2: Diminishing balance method/sum of digits
17.2.6.1.5.3: Units of production method
17.2.7 Recognition and measurement of impairment.
17.2.7.1 Extract from FRS 102 Section 17.24-17.26
17.2.8.1 Extract from FRS 102 Section 17.27-17.30
17.2.9.0 Extract from FRS 102 – Section 17.31-17.32A
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17.2.5 Measurement after Initial Recognition
17.2.5.1 Extract from FRC – FRS 102 – Section 17.15-17.15F
Subsequent measurement
17.15 An entity shall measure all items of property, plant and equipment after initial recognition using the cost model (in accordance with paragraph 17.15A) or the revaluation model (in accordance with paragraphs 17.15B to 17.15F). Where the revaluation model is selected, this shall be applied to all items of property, plant and equipment in the same class of asset (ie having a similar nature, function or use in the business). An entity shall recognise the costs of day-to-day servicing of an item of property, plant and equipment in profit or loss in the period in which the costs are incurred (Section 17.15).
Cost model
17.15A Under the cost model, an entity shall measure an item of property, plant and equipment at cost less any accumulated depreciation and any accumulated impairment losses.
Revaluation model
17.15B Under the revaluation model, 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 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.
17.15C The fair value of land and buildings is usually determined from market-based evidence by appraisal that is normally undertaken by professionally qualified valuers. The fair value of items of plant and equipment is usually their market value determined by appraisal. The Appendix to Section 2 Concepts and Pervasive Principles provides further guidance on determining fair value.
17.15D If there is no market-based evidence of fair value because of the specialised nature of the item of property, plant and equipment and the item is rarely sold, except as part of a continuing business, an entity may need to estimate fair value using an income or a depreciated replacement cost approach.
Reporting gains and losses on revaluations
17.15E 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. 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.
17.15F The decrease of an asset’s carrying amount as a result of a revaluation shall be recognised in other comprehensive income to the extent of any previously recognised revaluation increase accumulated in equity, in respect of that asset. If a revaluation decrease exceeds the accumulated revaluation gains accumulated in equity in respect of that asset, the excess shall be recognised in profit or loss.
17.2.5.2 OmniPro comment
17.2.5.2.1 Cost model (see Section 17.15 and 17.15A of FRS 102)
The cost model as the names suggests involves measuring property, plant and equipment at cost less accumulated depreciation and impairment.
17.2.5.2.2 Revaluation model (see Section 17.15B to 17.15F of FRS 102)
Where an entity chooses to adopt a cost model, then it does not revalue the asset class during its life. However, should an entity wish to adopt a revaluation model in the future and change its accounting policy, the company has this choice. Under Section 10.10A of FRS 102, Accounting policies in FRS 102, this change in accounting policy does not require a prior year adjustment; instead, the change is treated as a revaluation in the year and applied prospectively.
Section 17.15B to 17.15F of FRS 102 does not allow entities to cherry pick which assets they want to revalue instead they require assets in the same class to be revalued. This indicates that the same class is a grouping of assets of a similar nature and use in an entity’s operations. Usually each class of asset would be shown in the fixed asset note in the financial statements. There is no precise definition given in the standard of what a class of asset is, however the below would be indicative of separate class of assets:
- Land
- Buildings
- Machinery
- Ships
- Aircraft
- Motor vehicles
- Furniture and fixtures
- Office equipment; and
- Factories/industrial buildings.
Example 8: Revaluation of assets of the same class
A company has two factories in Ireland (manufacturing the same type of products) and wishes to revalue one of these premises. Under Section 17, the factories would be seen to be part of the same asset class, as a result the company would have to adopt a revaluation policy for both factories, if they do not then a policy of revaluation cannot be adopted.
In contrast another company has office buildings and factory buildings and the company wants to revalue the office building only. Given that the office buildings and the factories are different asset classes as both properties have different characteristics in relation to their function and nature. The company can choose to just adopt a revaluation policy on the office buildings only. If there were a number of office buildings all office buildings would need to be valued at the same time, however assets can be valued on a rolling basis provided they are performed within a short period of time and the revaluations are kept up to date. However, where rolling valuations are performed, in the PPE note, the properties will need to be shown separately with an appropriate disclosure given.
17.2.5.2.2.1 Frequency of revaluations
Section 17.15B of FRS 102, does not require revaluations to be performed every year but instead states that a valuation should be performed where the fair value of PPE at the balance sheet date differs materially from the carrying amount of the asset. Judgement will be required in this area, but whether a material change has occurred, would be deemed to be one which would influence the decisions of the users of the financial statements. In determining this, the company would generally consult their valuers and consider factors such as changes in the general market conditions, the condition of the asset, changes to the asset and its location. In order to provide sufficient detail to the entity’s auditors and in order to ensure values have not moved sufficiently, it is likely that management would be in contact with valuers who would provide information on the general market on an annual basis.
The frequency of valuations will therefore depend on movements in the fair value of PPE. In a volatile period this will require more frequent revaluations and as a result may require a valuation annually. This compares to a stable period where the valuations will be required less frequently, revaluations every three or five years may be sufficient however the standard does not mandate this nor does the standard say this other than to say it must be carried out with sufficient regularity.
There is no specific requirement for a professional valuer to be used however it would be usual for one to perform the valuations as stated in section 17.15C of FRS 102. If an internal party carries out a revaluation it would be usual that they would have appropriate experience to carry this out. However, the standard does not specifically mention this.
17.2.5.2.2.2 Meaning of fair value (see Section 11.17 to 11.19 of FRS 102)
Fair value is defined as the amount for which an asset could be exchanged for, a liability settled or an equity instrument granted could be exchanged between knowledgeable, willing parties in an arm’s length transaction. For land and buildings, this fair value is generally market value i.e. the best price that could be obtained for the property whether that be using it for its existing use or for some other use. Section 17.15D of FRS 102 makes it clear that the depreciated replacement cost or the income approach should only be used for specialist plant and equipment when market value cannot be determined. Examples of specialist plant and equipment are: oil refineries, power stations, schools, colleges, hospitals, museums and libraries. The income approach is not defined in the standard however it is likely to mean the discounted future cash flow potential of the assets. For a further definition of fair value see sections 11.17 to 11.19 of FRS 102.
17.2.5.2.2.3 Accounting for revaluation surpluses/deficits (see Section 17.15B to 17.15F of FRS 102 )
Section 17.15E and 17.15F state that a revaluation surplus should be recognised in OCI and then accumulated in the revaluation reserve unless it reverses a previous revaluation deficit on that asset which was posted to the profit and loss. Where a revaluation deficit occurs, this would be recognised in OCI and then set against the revaluation reserve up until the revaluation reserve is reduced to nil in relation to that asset and at that point the balance is posted to the profit and loss.
If the revalued amount of an asset is being depreciated, the full amount of any reversal of a previous devaluation is not taken to the profit and loss. Instead, the reversal should take account of the depreciation that would have been charged on the previously higher book value/cost before any revaluations. Although this is not stated in Section 17, this treatment is consistent with Section 27.30 of FRS 102 – Impairments.
Section 29.6 of FRS 102 requires deferred tax to be recognised on the movement in value, the rate to be used where the asset is depreciated is the trading tax rate. The rate to be used is the rate expected to be in place at the time the economic benefits are obtained i.e. currently 12.5% under Irish legislation. Where the asset is not depreciated the sales tax rate should be utilised as this rate is mandated by Section 29.15 of FRS 102 (e.g. land). Note where capital allowances are allowable on the asset, deferred tax would be accounted for as with any other asset.
Example 9: Accounting for revaluations and subsequent movements – depreciable assets
Company A has adopted a policy of revaluation on its PPE. The company purchased an asset for CU500,000 at the start of year 1 and determined the useful life to be 20 years. By the end of year one, there were indications of a change in market conditions and a valuation exercise was performed which showed the market value at CU525,000. At the end of year 4, a further valuation was performed as the difference in fair value and the carrying value was material, at this time the value was reduced to CU300,000. In year 8, a further valuation was performed which indicated a fair value of CU600,000.
Assume the deferred tax rate is 10% (this is not the sales rate as the asset is depreciated) and the asset does not qualify for capital allowances. Assume the depreciation on the revalued amount is transferred from the revaluation reserve to profit and loss reserves on a year by year basis as the depreciation is charged.
Company A would account for the changes in value in the following way:
At end of year 1:
The carrying value of the asset is CU475,000 (i.e. CU500,000 less depreciation for one year of CU25,000 (CU500,000/20yrs))
| CU | CU | |
|
Dr Fixed Assets (CU525,000-CU475,000) |
50,000 | |
| Cr OCI/Revaluation Reserve | 50,000 |
From then on the carrying amount of CU525,000 will be depreciated over the remaining life of 19 years (CU27,632 per annum).
Deferred tax
| CU | CU | |
| Dr OCI/Revaluation Reserve | 5,000 | |
|
Cr Deferred Tax in Balance Sheet (CU50,000 *10%) |
5,000 |
Therefore, the net amount posted to the revaluation reserve is CU45,000 (CU50,000-CU5,000). For year 2 to year 4, the deferred tax will be reduced and posted to the profit and loss account in line with the additional depreciation charged on the uplift in value of CU2,632 (i.e. CU27,632 less depreciation under cost basis of CU25,000).
At end of year 4:
The carrying value of the asset is CU442,104 (i.e. CU525,000 less depreciation of CU27,632 for three years totalling CU82,896)
| CU | CU | |
|
Dr Profit and Loss (CU142,104-CU50,000) |
100,000 | |
| Dr Revaluation Reserve (reversal of amount recognised in yr 1 of CU50,000 less depreciation reclassified from P&L of CU 2,632 for 3 years.) | 42,104 | |
|
Cr Fixed Assets (CU442,104-CU300,000) |
142,104 |
From then on the carrying amount of CU300,000 will be depreciated over the remaining life of 16 years (CU18,750 per annum).
Deferred tax
| CU | CU | |
|
Dr Deferred Tax in Balance Sheet (CU5,000 less (CU2,632 * 10%) * 3 years) = 789 |
4,211 | |
| Cr OCI/Revaluation Reserve | 4,211 |
Note deferred tax asset on the write down is not recognised on the basis that it is not reasonable that future economic benefits will be derived from the capital losses.
At end of year 8:
The carrying value of the asset is CU225,000 (i.e. CU300,000 less depreciation of CU18,750 for 4 years totalling CU75,000)
| CU | CU | |
|
Dr Fixed Assets (CU600,000 mkt value-CU225,000 NBV) |
375,000 | |
|
Cr Profit and Loss (CU100,000 previously posted-CU25,000 See Note 1 below) |
75,000 | |
|
Cr Revaluation Reserve (CU375,000-CU75,000) |
300,000 |
Deferred tax
| CU | CU | |
| Dr OCI/Revaluation Reserve | 10,000 | |
|
Cr Deferred Tax in Balance sheet ((CU600,000-CU500,000 original cost) * 10%) |
10,000 |
From then on the carrying amount of CU600,000 will be depreciated over the remaining life of 12 years.
Note 1: The amount that can be credited to the P&L is reduced by the additional depreciation that would have been charged had the asset not been revalued downward in the past i.e. original cost prior to downward revaluation of CU500,000 / useful life of 20 years= CU25,000 * 4 years = CU100,000. This compares to depreciation charged while the asset was being depreciated on the reduced amount of CU75,000 (year 5 to year 8 – CU300,000/UEL of 16 years* 4 years) = CU25,000
Example 10:Accounting for initial and subsequent revaluations on non-depreciable assets – i.e. on land
Company A has adopted a policy of revaluation on its PPE. The company purchased land for CU500,000 at the start of year 1. By the end of year 1, there were indications of a change in market conditions and a valuation exercise was performed which showed the market value at CU525,000. At the end of year 4, a further valuation was performed as the difference in fair value and the carrying value was material, at this time the value was reduced to CU300,000. In year 8, a further valuation was performed which indicated a fair value of CU700,000.
Assume the deferred tax rate on a sale of this asset is 20%
Company A would account for the changes in value in the following way:
At end of year 1:
| CU | CU | |
|
Dr Fixed Assets (CU525,000-CU500,000) |
25,000 | |
| Cr OCI/Revaluation Reserve | 25,000 |
Deferred tax
| CU | CU | |
| Dr OCI/Revaluation Reserve | 5,000 | |
|
Cr Deferred Tax in Balance Sheet (CU25,000* 20%) |
5,000 |
Therefore, the net amount posted to the revaluation reserve is CU20,000.
At end of year 4:
| CU | CU | |
| Dr Profit and Loss | 200,000 | |
|
Dr OCI/Revaluation Reserve (being the amount previously recognised) |
25,000 | |
|
Cr Fixed Assets (CU525,000-CU300,000) |
225,000 |
Deferred tax
| CU | CU | |
| Dr Deferred Tax in Balance Sheet (CU25,000 * 20%) | 5,000 | |
|
Cr OCI/Revaluation Reserve (CU25,000 * 20%) |
5,000 |
Note deferred tax asset on the write down of the land is not recognised on the basis that it is assumed that it is not reasonable that future economic benefits will be derived from the capital losses as there are no chargeable gains to set this loss against.
At end of year 8:
| CU | CU | |
|
Dr Fixed Assets (CU700,000-CU300,000) |
400,000 | |
| Cr Profit and Loss i.e. reversal of amounts previously recognised in P&L | 200,000 | |
|
Cr OCI/Revaluation Reserve (CU400,000-CU200,000) |
200,000 |
Deferred tax
| CU | CU | |
|
Dr OCI/Revaluation Reserve (CU200,000 * 20%) |
40,000 | |
|
Cr Deferred Tax in Balance Sheet ((CU400,000-CU200,000) * 20%) |
40,000 |
17.2.5.2.2.4 Treatment of depreciation on upward revaluations
The revaluation surplus included in equity may be transferred directly to retained earnings when the surplus is realised i.e. disposed of, retired from use or as the asset is used by the entity. The transfer is made through reserves and not through the profit and loss. In relation to a transfer being completed as a result of the asset being used by the entity, the amount to be transferred is the difference between the depreciation charged to the profit on loss on the revalued amount compared to the depreciation that would have been charged had no revaluation occurred. Company law requires that a historical cost profit note be included in the financial statements detailing the profit that would have been reported had a revaluation policy not applied.
Example 11: Transfer of depreciation on revalued amount from profit and loss reserves
Taking example 9 above, at the end of year 2 for the depreciated asset, the additional depreciation charged of CU2,632 (CU27,632-CU25,000) as a result of the revaluation and the related deferred tax credit on this of CU263 (CU2,632*10%), would be transferred from P&L reserves to the revaluation reserve. The below would be shown in the statement of changes to equity in the financial statements.
Year 2
| CU | |
| Revaluation Reserve at 01/01/Year 2 | 45,000 |
| Transfer from Profit & Loss Reserve (CU2,632-263) | (2,369) |
| Revaluation Reserve at 31/12/Year 2 |
42,631 |
| CU | |
| Profit and Loss Reserves at 01/01/Year 2 | 50,000 |
| Transfer to Revaluation Reserve | 2,369 |
| Profit and Loss Reserves Reserve at 31/12/Year 2 |
52,369
|
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Example 2: Replacement of a major component which was previously not separated
Example 3: Periodic replacement
Example 4: Separation of land and buildings
Example 5: Employee costs during construction
Example 6: purchasing on deferred credit terms
Example 7: Exchange of assets- assets that lack commercial substance
Example 8: Revaluation of assets of the same class
Example 9: Accounting for revaluations and subsequent movements – depreciable assets
Example 11: Transfer of depreciation on revalued amount from profit and loss reserves
Example 12: Revising a residual value of an asset
Example 13: Change in accounting policy disclosure
Example 14: Commencement of depreciation
Example 15: Depreciation on basis of units of production
Example 17: Extract from notes to the financial statements (assuming revaluation upwards)
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