REVALUATION
Initial Recognition of PPE-Cost
Subsequent Recognition-Either Cost Model or Revaluation Model
When PPE are revalued, the entire class of property, plant and equipment
should be revalued.
Class of PPE-grouping of assets of a similar nature and use
Basis of Revaluation
a. Fair Value (determined by appraisal)
b. Depreciated Replacement Cost(when fair value is not available)
Frequency of Revaluation
Depends upon the changes in the fair value of PPE
When the fair value of the revalued asset differs materially from
the carrying amount, revaluation is necessary
TERMS TO REMEMBER
[Link] Amount-(fair value or depreciated replacement cost)
b. Fair Value-(price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction)
c. Depreciated Replacement Cost or Sound Value-(Replacement cost less the
accumulated depreciation)
d. Replacement Cost-(current purchase price)
e. Carrying Amount
f. Revaluation Surplus-(Fair Value or Depreciated Replacement Cost less Carrying
amount)
(Appreciation less Accumulated Depreciation)
*Component of Other Comprehensive Income
*Transferred to Retained Earnings
g. Appreciation or Revaluation Increase(excess of replacement cost over the historical
cost)
Illustration:
The ffg data pertain to machinery on the date of revaluation:
Cost Replacement Cost
Machinery 3,000,000 4,800,000
Accumulated Depreciation 750,000 1,200,000
Determine the ffg:
a. Carrying Amount
b. Appreciation
c. Depreciated Replacement Cost
d. Revaluation Surplus
Carrying Amount Revaluation Surplus
Cost 3,000,000 Sound Value 3,600,000
Accumulated Depreciation 750,000 Carrying Amount 2,250,000
2, 250,000 1,350,000
Appreciation
Replacement Cost 4,800,000
Cost 3,000,000
1,800,000
Depreciated Replacement Cost
Replacement Cost 4,800,000
Accumulated Depreciation 1,200,000
3,600,000
The machinery will be presented in the statement of financial position at an amount
equal to its sound value
Accordingly, the historical cost and the related accumulated depreciation shall be
disclosed in the notes to financial statements
Approaches in Recording Revaluation
Proportional Approach-(Accumulated depreciation at the date of revaluation is restated
proportionately with the change in the gross carrying amount of the asset)
Elimination Approach-(Accumulated depreciation is eliminated against the gross carrying
amount of the asset and the net amount restated to the revalued amount)
Illustration 1: No change in useful life
The ffg data pertain to machinery on the date of revaluation:
Cost Replacement Cost
Machinery 8,000,000 12,000,000
Accumulated Depreciation 2,000,000
*The machinery was revalued 5 years from the date of acquisition.
Computation:
(Proportional Approach)
Cost Replacement Cost Appreciation
Machinery 8,000,000 12,000,000 4,000,000
Accumulated Depreciation 2,000,000 3,000,000 1,000,000
CA/SV/RS 6,000,000 9,000,000 3,000,000
Elimination Approach
Accumulated Depreciation 2,000,000
Machinery 2,000,000
Machinery 3,000,000
Revaluation Surplus 3,000,000
Piecemeal Realization of Revaluation Surplus
With the previous illustration,
Revaluation Surplus 200,000
Retained Earnings 200,000
*realized over the useful life of the asset
(If the asset is sold, whole surplus must be realized)
Illustration: Change in life and residual value
Cost Replacement Cost
Machinery 8,500,000 12,400,000
Residual Value 500,000 400,000
Accumulated Depreciation 3,200,000
*The original useful life is 10 years; revised useful life of 12 years from the date of
acquisition
Cost Replacement Cost Appreciation
Machinery 8,500,000 12,400,000 3,900,000
Residual Value 400,000 400,000 0
Depreciable Amount 8,100,000 12,000,000 3,900,000
Accumulated Depreciation 40% 3,200,000 4,800,000 1,600,000
4,900,000 7,200,000 2,300,000
Revaluation:
Machinery 3,900,000
Accumulated Depreciation 1,600,000
Revaluation Surplus 2,300,000
Annual Depreciation:
Depreciation 900,000
Accumulated Depreciation 900,000
Piecemeal Realization of Revaluation Surplus:
Revaluation Surplus 287,5000
Retained Earnings 287,500
Revaluation Decrease
Charged against any revaluation surplus and the balance to expense
Illustration:
Equipment at cost January 1, 2020 5,000,000
Accumulated Depreciation 2,000,000
(10 year life,4 years expired)
*The equipment is revalued at a sound value of Php 4,800,000
Gross Replacement Cost
4,800,000/60%=8,000,000
Cost Replacement Cost Appreciation
Equipment 5,000,000 8,000,000 3,000,000
Accumulated Depreciation 40% 2,000,000 3,200,000 1,200,000
CA/SV/RS 3,000,000 4,800,000 1,800,000
On December 31, 2022:
Depreciated Replacement Cost Balance: 2,400,000
Revaluation Surplus Balance: 900,000
If on January 1, 2023, the fair value is Php 1,050,000.00:There is revaluation decrease of Php
1,350,000.00
Journal Entry:
Accumulated Depreciation 3,150,000
Revaluation Surplus 900,000
Revaluation Loss 450,000
Equipment 4,500,000