The market value of land and buildings usually represents fair value, assuming existing use and line of business. Such valuations are usually carried out by professionally qualified valuers.  

Most importantly, when an item of property, plant and equipment is revalued, the whole class of assets to which it belongs should be revalued.

In the case of plant and equipment, fair value can also be taken as market value. Where a market value is not available, however, depreciated replacement cost should be used. There may be no market value where types of plant and equipment are sold only rarely or because of their specialized nature (i.e. they would normally only be sold as part of an ongoing business).

The frequency of valuation depends on the volatility of the fair values of individual items of property, plant and equipment. The more volatile the fair value, the more frequently revaluations should be carried out. Where the current fair value is very different from the carrying value then a revaluation should be carried out.

All the items within a class should be revalued at the same time, to prevent selective revaluation of certain assets and to avoid disclosing a mixture of costs and values from different dates in the financial statements. A rolling basis of revaluation is allowed if the revaluations are kept up to date and the revaluation of the whole class is completed in a short period of time. 

Recognition of Fixed Assets – Benchmark Treatment:

The benchmark treatment of IAS 16 is to carry property plant and equipment at Cost less Accumulated Depreciation and any Accumulated Impairment Losses.

Impairment Losses:

A fall in the value of an asset, so that its recoverable amount is now less than its carrying value in the balance sheet.

Carrying value:

Is the net value at which the asset is included in the balance sheet (i.e. after deducting accumulated depreciation and any impairment losses?)

Difference between Depreciation and Impairment:

Depreciation is the result of systematic allocation of the depreciable amount of an asset over its estimated useful life. Depreciation for the accounting period is charged to net profit or loss for the period either directly or indirectly.

However the impairment in the value of any asset is a fall in the value of an asset due to many reasons beyond the control of the company, so that its recoverable amount is now less than its carrying value in the balance sheet. 

Recognition of Fixed Assets – Allowed Alternative Treatment:

The standard allows as an alternative treatment to record property plant and equipment at its Revalued Amount less Accumulated Depreciation and any Accumulated Impairment Losses

Revalued Amount:

The revalued amount of any asset is the fair value of that asset. The market value of any asset represents its fair value.

Revaluation Policy

All assets of same class are revalued at the same time.

Only recognized surveyor can carryout the revaluation.

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

A class of property, plant and property is a grouping of assets of a similar nature and use in an enterprise’s operations.

The following are examples of separate classes:

  1. Land;
  2. Land and building;
  3. Machinery;
  4. Ships
  5. Aircrafts;
  6. Motor vehicles;
  7. Furniture and fixtures; and
  8. Office equipment

Frequency of Revaluation

A review of the useful life of property, plant and equipment should be carried out at least each financial year end and the depreciation charge for the current and future periods should be adjusted if expectations have changed significantly from previous estimates. Changes are changes in accounting estimates and are accounted for prospectively as adjustments to future depreciation.

If the allowed alternative, that is stating the assets at revalued amount is adopted then the revaluation has to be carried out at regular intervals.

These intervals may vary from every year to three to five years depending upon the volatility in the market value of assets in use.

Who Can Conduct Revaluation?

International Accounting Standard IAS 16:

International Accounting Standard IAS 16 requires that revaluation should be carried out by professionally qualified valuers.

Companies Ordinance:

Companies Ordinance in 4th Schedule requires that valuation should be carried out by an independent valuer (expert) competent to do so.

The Companies Ordinance 1984 defines the expert as:

"Expert" includes an engineer, a valuer, an accountant and every other person whose profession gives authority to a statement made by him.

Effect of Revaluation:

The value of an item of property, plant and equipment may be increased or decreased as a result of revaluation.

How should any increase in value be treated when a revaluation takes place? The debit will be the increase in value in the balance sheet, but what about the credit? IAS 16 requires the increase to be credited to a revaluation surplus (i.e. part of owners’ equity), unless the increase is reversing a previous decrease which was recognized as an expense. To the extent that this offset is made, the increase is recognized as income; any excess is then taken to the revaluation reserve.

Treatment of Revaluation Loss

A revaluation loss is charged to profit and loss account in the period in which the revaluation is carried out.

However a revaluation decrease should be charged directly against any related revaluation surplus to the extent that the decrease does not exceed the amount held in surplus in respect of the same asset.

In other words decrease should be recognised as an expense, except where it offsets a previous increase taken as a revaluation surplus in owners’ equity. Any decrease greater than the previous upwards increase in value must be taken as an expense in the income statement.  

financial management

January 06, 2018