Definition of the Revaluation Model (IAS 16)

Per IAS 16, paragraph 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."

Key Features:

- PPE is carried at fair value (market value) rather than historical cost (as in the cost model).

- Depreciation continues after revaluation, based on the revalued amount.

- Impairment testing (IAS 36) applies if the carrying amount exceeds the recoverable amount.

Why the Revaluation Model is Used

The revaluation model is an optional alternative to the cost model under IAS 16. Its purposes
include:
1. Reflect Economic Reality:

- Fair value better represents the current worth of assets like land or buildings, which may
appreciate over time, unlike the static cost model.
- Example: Land purchased for R100,000 decades ago might now be worth R500,000 due
to market growth.

2. Enhance Financial Statement Relevance:

- Provides users (e.g., investors and creditors) with up-to-date information on asset values,
improving decision-making.

3. Support Equity Adjustments:

- Revaluation surpluses increase equity (via a revaluation reserve), reflecting unrealized gains
without selling the asset.

4. Industry Practice:

- Common in sectors where asset values fluctuate significantly (e.g., real estate,
infrastructure), aligning with market-based reporting.

How Often Revaluations Occur

Per IAS 16, paragraphs 31 and 34:

Frequency:

- Revaluations must be carried out regularly to ensure the carrying amount does not differ
materially from fair value at the reporting date.

The frequency depends on the volatility of the asset’s fair value:

General Revaluation Process (IAS 16)

The revaluation process involves several steps:

1. Determine Fair Value:

- Fair value is typically market value obtained from:

- Professional appraisals (e.g., by a valuer).

2. Adjust Carrying Amount:

- Compare the fair value to the current carrying amount (cost or previous revalued amount
less accumulated depreciation).
- Adjust the asset’s value up (surplus) or down (deficit).

3. Record the Revaluation Effect:

- Surplus: Credit to equity (revaluation reserve) via other comprehensive income (OCI) unless
reversing a prior deficit.
- Deficit: Debit to profit or loss, unless reversing a prior surplus (then offset against
revaluation reserve).

4. Depreciate the Revalued Amount:

- Recalculate depreciation based on the new carrying amount, remaining useful life, and
residual value.

5. Account for Accumulated Depreciation:

Treatment of accumulated depreciation on the date of revaluation:

- Eliminate the accumulated depreciation against the gross carrying amount of the asset.
- Proportionately restate accumulated depreciation for the effect of the change in the gross
carrying amount of the asset.

Accounting Treatment with Journal Entries

Example 1

The following information is in respect of the Jud Limited's plant:

Historical cost (1 January 20.1) R8 000 000

Carrying amount (31 December 20.2) – depreciated historic cost R4 800 000

Fair value (1 January 20.3) R6 000 000

The company depreciates the plant over 5 years using the straight-line basis to nil residual values.
The company releases the revaluation surplus reserve directly to retained earnings as it becomes
realised.

The company uses the revaluation model for subsequent measurement of its property, plant, and
equipment and accounts for revaluations using the net replacement value method. The fair value
given above was measured using the cost approach. The company revalued its plant on 1 January
20.3, in terms of IAS 16. Accumulated depreciation is reversed against the gross carrying amount
immediately before the revaluation.

Required: Prepare journal entries for the year ended 31 December 20.3 to 20.5.

Eliminate the accumulated depreciation

Journal 1:

Dr. Accummulated depreciation (balance on the date of revaluation)

Cr Asset (reducing the cost of the asset to its carrying amount)

Dr. Asset (with the difference between depreciated replacement cost and carrying amount )

Cr Revaluation surplus/gain (OCI)

Journal 2:

Dr. Accummulated depreciation (balance on the date of revaluation)

Dr. Asset (depreciated or net replacement cost/FV)

Cr Asset (original cost of revalued asset)

Cr Revaluation gain/surplus (OCI)

Example 2

Burgundy Limited purchased the plant on 1 January 20x1 for R150 000. The company depreciates
the plant over 5 years using straight-line depreciation to a nil residual value.

The company uses the revaluation model for subsequent measurement of its property, plant, and
equipment and accounts for revaluations using the net replacement value method. The fair values
listed below were measured using the cost approach:

On 1 January 20x2 Fair value of R180 000 as determined by an independent valuer

On 1 January 20x3 Fair value of R75 000 as determined by an independent valuer

On 1 January 20x4 Fair value of R75 000 as determined by an independent valuer

The company transfers the maximum amount possible from the revaluation surplus to retained
earnings annually. Impairment testing at the end of each year found that the recoverable amounts
were higher than the carrying amounts. Accumulated depreciation is reversed against the gross
carrying amount immediately before the revaluation.

REQUIRED: Journalise the transactions for 31 December 20x2, 20x3, and 20x4. Ignore tax.

SHOW ALL YOUR WORKINGS.

Disclosure Requirements (IAS 16, Paras 77–79)

Note X: PPE (2025)

Carrying Amount: Rxxx (Cost model equivalent: Rxxx).

Reconciliation:

Opening Balance

Revaluation Surplus

Depreciation

Closing Balance

Revaluation Reserve (after transfer to retained earnings).