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Corporate Accounting & Reporting I

Lecture 9

Revaluation Model and Investment Property

Lecture 8 Topics

Topic 1 Revaluation model of PPE

Topic 2 Accounting for investment property

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Topic 1
Revaluation model of PPE

Topic 1 3

Revaluation model of PPE

Why is PPE valuable to a firm?

Topic 1 4

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Revaluation model of PPE

Investment cycle

Cash -

Investment in
non-current assets

Operating Operating
cycle cycle Cash +
Cash + Investment in Investment in
current assets current assets

Operating Operating
cycle cycle
Investment in Investment in
Cash +
Cash + current assets current assets

Topic 1 5

Revaluation model of PPE

Cost model

The traditional accounting model of PPE (cost model):

• PPE is carried at cost less accumulated depreciation (including
accumulated impairment losses).
• Rationale: the value of the PPE is not due to its resale value on
the market (fair value), but instead due to its revenue generating
capacity in the future.

Topic 1 6

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Revaluation model of PPE

Cost model

The traditional accounting model of PPE (cost model):

• PPE is carried at cost less accumulated depreciation (including
accumulated impairment losses).
• Rationale: the value of the PPE is not due to its resale value on
the market (fair value), but instead due to its revenue generating
capacity in the future.
• Consequence: the book value of assets can be much lower than
their liquidating value.
• The going concern assumption dictates that we should not care
about the liquidating value

Topic 1 7

Revaluation model of PPE

Revaluation model

The new accounting model of PPE (revaluation model under

IFRS):
• PPE is carried at fair value at the date of the revaluation less any
subsequent accumulated depreciation.
• The frequency of revaluation depends upon the changes in fair
values of the items of property, plant and equipment being
revalued.
• A company can select to value only one class of assets, say land,
and not revalue other assets such as building or equipment.
• It is not consistent with the going concern assumption.

Topic 1 8

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Revaluation model of PPE

Major classes of PPE

(a) land;
(b) buildings;
(c) machinery;
(d) ships;
(e) aircraft;
(f) motor vehicles;
(g) furniture and fixtures;
(h) office equipment; and
(i) bearer plants.

Topic 1 9

Revaluation model of PPE

Reporting of revaluation gains and losses

• Gain:
If an asset’s carrying amount is increased as a result of a
revaluation, the increase shall be recognised in other
comprehensive income, unless the increase reverses a
revaluation decrease of the same asset previously
reported in the income statement.

Topic 1 10

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Revaluation model of PPE

Reporting of revaluation gains and losses

• Gain:
If an asset’s carrying amount is increased as a result of a
revaluation, the increase shall be recognised in other
comprehensive income, unless the increase reverses a
revaluation decrease of the same asset previously
reported in the income statement.
• Loss:
If an asset’s carrying amount is decreased as a result of a
revaluation, the decrease shall be reported in the income
statement, unless the decrease reverses a revaluation
surplus.

Topic 1 11

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Revaluation model of PPE

Hotel Royal Limited (SGD)

``Property, plant and equipment are stated at cost less

accumulated depreciation and any accumulated
impairment losses except for freehold land on which
certain hotels are sited, which are stated at revalued
amounts. Revaluations of freehold hotel land is
performed with sufficient regularity such that the
carrying amounts do not differ materially from those
which would be determined using fair values at the
end of the reporting period.’’

Topic 1 12

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Revaluation model of PPE

Network Rail (GBR)
``Network Rail’s use of fair value led to an
increase of £4,289 million to its long-lived
tangible assets. When companies choose to
report at fair value their long-lived tangible
assets subsequent to acquisition, they account
for the change in the fair value by adjusting the
appropriate asset account and establishing an
unrealized gain on the revalued long-lived
tangible asset. This unrealized gain is often
referred to as revaluation surplus.’’

Topic 1 13

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Revaluation model of PPE

Example – nondepreciable asset
Siemens Group (DEU) purchased land for €1,000,000 on January 1,
2020. The company elects to use revaluation accounting for the
land in subsequent periods. On December 31, 2020, the land’s fair
value was €1,200,000. The entry to record the revaluation is as
follows.

Land 200,000
Revaluation Surplus — Land 200,000
(Unrealized Gain on Revaluation — Land)

Topic 1 14

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Revaluation model of PPE

Example – nondepreciable asset
On December 31, 2021, the land’s fair value becomes €900,000.
What is the journal entry to record this revaluation?

Topic 1 15

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Revaluation model of PPE

Example – nondepreciable asset
On December 31, 2022, the land’s fair value becomes €1,100,000.
What is the journal entry to record this revaluation?

Topic 1 16

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Revaluation model of PPE

Example – nondepreciable asset
On January 1, 2023, the land is sold €1,100,000 for cash. The
journal entries to record this sale is as follows.

Cash 1,100,000
Land 1,100,000

Revaluation Surplus — Land 100,000

Retained Earnings 100,000

We also need to “recycle” the Revaluation Surplus, as the gain is considered realized.

Topic 1 17

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Revaluation model of PPE

Example – depreciable asset
Lenovo Group (CHN) purchased equipment for ¥500,000 on
January 1, 2020. The equipment has a useful life of five years is
depreciated using the straight-line method of depreciation, and
its residual value is zero. Lenovo chooses to revalue its
equipment to fair value over the life of the equipment. Lenovo
records depreciation expense of ¥100,000 (¥500,000 ÷ 5) on
December 31, 2020, as follows.

Depreciation Expense 100,000

Accumulated Depreciation — Equipment 100,000

Topic 1 18

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Revaluation model of PPE

Example – depreciable asset
After this entry, Lenovo’s equipment has a carrying amount of
¥400,000 (¥500,000 - ¥100,000). Lenovo receives an independent
appraisal for the fair value of equipment on December 31, 2020,
which is ¥460,000. The entry to record this revaluation is as follows:

Accumulated Depreciation—Equipment 100,000

Equipment 40,000
Revaluation Surplus — Equipment 60,000

Topic 1 19

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Revaluation model of PPE

Example – depreciable asset
On December 31, 2021, the equipment’s fair value becomes
¥300,000. What is the journal entry to record this revaluation?

Topic 1 20

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Revaluation model of PPE

Example – depreciable asset
On December 31, 2021, the equipment’s fair value becomes
¥300,000. What is the journal entry to record this revaluation?
Depreciation Expense 115,000
Accumulated Depreciation — Equipment 115,000

Topic 1 21

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Revaluation model of PPE

Example – depreciable asset
On December 31, 2021, the equipment’s fair value becomes
¥300,000. What is the journal entry to record this revaluation?
Depreciation Expense 115,000
Accumulated Depreciation — Equipment 115,000

Revaluation Surplus — Equipment 15,000

Retained Earnings 15,000

Topic 1 22

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Revaluation model of PPE

Example – depreciable asset
On December 31, 2021, the equipment’s fair value becomes
¥300,000. What is the journal entry to record this revaluation?
Depreciation Expense 115,000
Accumulated Depreciation — Equipment 115,000

Revaluation Surplus — Equipment 15,000

Retained Earnings 15,000

Accumulated Depreciation—Equipment 115,000

Revaluation Surplus — Equipment 45,000
Equipment 160,000

Topic 1 23

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Revaluation model of PPE

Example – depreciable asset
On January 1, 2022, the equipment is sold ¥300,000 for cash. What
is the journal entry to record this sale?

Topic 1 24

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Revaluation model of PPE

Revaluation versus impairment

• Revaluation is done at asset level while impairment is typically

done at CGU level.

Topic 1 25

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Revaluation model of PPE

Revaluation versus impairment

• Revaluation is done at asset level while impairment is typically

done at CGU level.
• Value-in-use may affect impairment but does not affect
revaluation.

Topic 1 26

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Revaluation model of PPE

Revaluation versus impairment

• Revaluation is done at asset level while impairment is typically

done at CGU level.
• Value-in-use may affect impairment but does not affect
revaluation.
• Revaluation’s effect on balance sheet is symmetric while
impairment’s effect is asymmetric.

Topic 1 27

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Revaluation model of PPE

Revaluation versus impairment

• Revaluation is done at asset level while impairment is typically

done at CGU level.
• Value-in-use may affect impairment but does not affect
revaluation.
• Revaluation’s effect on balance sheet is symmetric while
impairment’s effect is asymmetric.
• Revaluation frequency depends on volatility of fair value while
impairment is reviewed annually.

Topic 1 28

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Revaluation model of PPE

Revaluation versus impairment

• Revaluation is done at asset level while impairment is typically

done at CGU level.
• Value-in-use may affect impairment but does not affect
revaluation.
• Revaluation’s effect on balance sheet is symmetric while
impairment’s effect is asymmetric.
• Revaluation frequency depends on volatility of fair value while
impairment is reviewed annually.
• Impairment loss is reported in the income statement while
revaluation loss is first to offset previous revaluation gains.

Topic 1 29

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Topic 2
Accounting for investment property

Topic 2 30

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Accounting for investment property

What is investment property?

Property, plant, and equipment: Investment property:

Ø Used for production or supply of v Held to earn rentals or for capital

goods or services appreciation or both
Ø Generate cash flows jointly with v Generates cash flows
other assets independently of other assets
Ø Accounted using cost model or v Accounted using cost model or fair
revaluation model under IFRS value model under IFRS
Ø Accounting policy is chosen for each v Accounting policy is chosen for the
class of PPE all investment property

Topic 2 31

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Accounting for investment property

Comparing revaluation model with fair value model

Revaluation model: Fair value model:

Ø The measurement basis is fair value v The measurement basis is fair value
Ø Revaluation gain bypasses the v Both gain and loss are reported in
income statement unless it offsets income statement immediately
previous revaluation losses v No depreciation is recorded
Ø Depreciation is recorded for
depreciable asset

Topic 2 32

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Accounting for investment property

Land Securities Group

What are Land Securities’ primary operations?

Topic 2 33

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Accounting for investment property

Land Securities Group

What is the total value of asset reported for Land

Securities’ primary operation?

Topic 2 34

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Accounting for investment property

Land Securities Group

How much revenue is reported for Land Securities’ primary

operation?

Topic 2 35

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Accounting for investment property

Land Securities Group

How is investment property accounted in UK before the

adoption of IFRS (IAS 40)?

Topic 2 36

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Accounting for investment property

Land Securities Group

What are the major differences between the old UK

accounting standard and the current IFRS for investment
property?

Topic 2 37

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Accounting for investment property

Land Securities Group

If you were the manager of Land Securities, would you

choose the cost model or the fair value model?

Topic 2 38

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Accounting for investment property

Land Securities Group

How is investment property reported under US GAAP?

Topic 2 39

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Accounting for investment property

Land Securities Group

If Land Securities has a large number of investors from the

US, which accounting model should it use?

Topic 2 40

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End of the lecture

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