Revaluation of property, plant and equipment:

Before Revaluation
Discussion of Retained earnings
Suppose: First year of Business of a sole proprietor:
Capital Account
b/d --
Drawings 80,000 Cash 500,000
Profit 150,000
c/d 570,000

Second year of Business

b/d 570,000
Drawings 130,000 Profit 125,000
c/d 565,000
COMPANY
(First year of business)
Capital Account
1st year
b/d --
Cash 500,000
c/d 500,000

Retained Earnings Account

b/d --
Dividend 80,000 Profit 150,000
c/d 70,000
Dividend = Drawings by Owner of Company
Statement of financial position
At the end of 1st year
Non current assets XX
Current assets XX
XX
Capital & Liabilities:
Capital 500,000
Retained Earnings 70,000
570,000

Page 1 of 38
Second year of business
Capital Account
b/d 500,000
c/d 500,000

Retained Earnings Account

b/d 70,000
Dividend 130,000 Profit 125,000
c/d 65,000

Revaluation Model

Subsequent Measurement: (Measurement after initial recognition)

Cost model Revaluation Model
Cost - Revalued Amount -
Less Acc Depreciation (-) Less Acc Depreciation (-)
Carrying Amount __-__ Carrying Amount __-__

Revaluation Model
If revaluation model is adopted, carrying amount is compared with fair value at the date of revaluation.
For example:
1. Revaluation Date is 30-6-2010
Machine
Cost 500,000
Less Acc depreciation (150,000)
Carrying Amount 350,000
Fair value 600,000
There is an unrealized gain or expected gain of Rs 250,000 which is called as revaluation surplus.
Machine 250,000
Revaluation surplus 250,000
(This entry has no effect on profit or loss for the year)
Revaluation surplus is presented within equity in statement of financial position.

2) Revaluation date is 30-6-2015

Building
Cost 1,500,000
Less Acc depreciation (400,000)
Carrying Amount 1,100,000
Fair value 150,000

There is an expected loss of Rs 950,000 which is termed as revaluation loss.

Revaluation loss 950,000
Building 950,000
Revaluation loss is recognized in statement of profit or loss in the period in which it arises.
Conclusion: As a result of revaluation there could be a revaluation surplus or revaluation loss. After revaluation, value of asset is equal
to its fair value. After revaluation, fair value is depreciated over the asset’s remaining useful life.

Page 2 of 38
Example
1st revaluation as on 30-6-2011; Revaluation surplus = Rs 300,000
Machine 300,000
Revaluation surplus 300,000
2nd revaluation as on 30-6-2013
(i) Ist scenario; Revaluation loss = Rs 200,000
(ii) 2nd scenario; Revaluation loss = Rs 350,000
Important point to remember
Revaluation is not compulsory every year as per IAS-16.Revaluation entries are only required whenever there is a material difference
between carrying amount and fair value.
If there is a loss on revaluation of an asset in an accounting period but there is a balance of any revaluation surplus related to same
asset because of any previous revaluation then first adjust the loss against the surplus and the balance of loss (if any) is recognized in
statement of profit or loss.
Keeping in view the above point; adjusting entries will be;
Scenario i
Revaluation Surplus 200,000
Machinery 200,000
(No effect of this entry on statement of profit or loss)

Scenario ii
Revaluation Surplus 300,000
Revaluation Loss (bal) 50,000
Machinery 350,000
(Rs 50,000 will be recognized in statement of profit or loss)

Treatment of Acc Depreciation at the time of revaluation:

Machinery as on 30-6-2013
Cost 500,000
Less Acc depreciation (150,000)
Carrying Amount 350,000
Fair value 250,000
Revaluation loss 100,000
The adjustment of accumulated depreciation is only required if the asset account and accumulated depreciation accounts are
separately prepared. In such a situation, asset is revalued in two steps:
a) Eliminate the existing accumulated depreciation against the amount stated against the asset.
Acc Depreciation 150,000
Machinery 150,000
(The effect of this adjustment is that asset account is converted into WDV)
b) Restate the balance of WDV upto fair value.
Revaluation loss 100,000
Machinery 100,000
Entry (a) always remains same while entry (b) can be different depending on whether there is surplus or loss.

Another Example
Cost of Equipment 1,500,000
Less Acc depreciation (700,000)
Carrying Amount 800,000
Fair value 1,100,000
Revaluation surplus 300,000
Page 3 of 38
Prepare accounting entries related to revaluation:

a)
Acc Depreciation 700,000
Equipment 700,000
b)
Equipment 300,000
Revaluation surplus 300,000

 Before any further discussion please recall the calculation of retained earnings:
Opening balance of retained earnings -
Profit for the period -
Less: Dividend for the period (-)
Closing balance of retained earnings -

When the revaluation surplus is realized; (i.e transferred to retained earnings)

There are two methods:
a) Transfer the surplus (in full) when the asset is or b) Transfer the surplus as the asset is used and
disposed off depreciated (annually).

1) Transfer the surplus (in full) when the asset is disposed off:
Example
A machinery having a revalued amount of Rs 260,000 and accumulated depreciation amounting to Rs 13,000 is sold for Rs
253,000 on 30-6-2013. On this date, balance of revaluation surplus is 75,000.
Required:
Prepare necessary journal entries to account for the disposal.
Solution
a)
Cash 253,000
Acc Depreciation 13,000
Machinery 260,000
Gain (bal) 6,000
(Rs 6,000 is treated as an other income in income statement)

b)

Revaluation Surplus 75,000

Retained Earnings 75,000
(Transfer of whole surplus to retained earnings on disposal but not through statement of profit or loss)

Movement of retained earnings and presentation of transfer of revaluation surplus:

Opening balance of retained earnings -
Profit after tax -
Transfer of surplus -
Dividend for the period (-)
Closing balance of retained earnings -

Another Example:
An equipment has following values at the time of disposal:
Revalued Amount 600,000
Acc Depreciation (150,000)
450,000
Revaluation Surplus 300,000

Page 4 of 38
 It is sold for Rs 325,000
a)
Cash 325,000
Acc Depreciation 150,000
Loss 125,000
Equipment 600,000
b)
Revaluation Surplus 300,000
Retained Earnings 300,000

2) Transfer the surplus annually:

In this case surplus is transferred to retained earnings as the asset is depreciated annually. The basis of calculation of amount of
transfer should be exactly similar to the basis of calculation of depreciation. The entry of transfer remains same as discussed
earlier; i.e
Revaluation Surplus Xxx
Retained Earnings xxx

If the question is silent regarding the policy of transfer of surplus then transfer the surplus as the asset is used and depreciated (to
adjusted the effect of extra depreciation annually; otherwise if the policy of transfer of surplus is on disposal then that effect will be
adjusted on disposal).

Revaluation model:
1) This model involves revaluing the asset’s carrying amount to its fair value (FV) (Also known as revalued amount).
2) If FV is more than carrying amount then revaluation surplus
3) If FV is less than carrying amount revaluation loss
4) If there is revaluation surplus already in existence for an asset because of a previous revaluation, then subsequent
revaluation loss is adjusted against surplus. If loss is more than surplus, difference is recorded in income statement.
5) Depreciation should be charged on cost of asset. If there is a surplus then effect of extra depreciation is transferred to
retained earnings. If there is a revaluation loss then effect of less charged depreciation should be charged when there is a
subsequent surplus in future.
6) After revaluation, revalued amount (FV) is depreciated over remaining useful life.
7) When revaluation surplus is realized (means transferred to retained earnings)
a) At the time of disposal/end of useful life; or
b) As the asset is used by the entity and depreciated (period wise)
If the question is silent then follow the (b) policy.
8) Treatment of accumulated depreciation at the time of revaluation:
a) Eliminate against cost (net replacement value method)
b) Restate up to revalued amount
9) If an asset is revalued, then all the assets in the class of asset need to be revalued. The following are examples of classes of
property, plant and equipment.
(i) Land
(ii) Building
(iii) Plant and Machinery
(iv) Motor Vehicles
(v) Furniture & Fixtures
(vi) Office Equipment.
10) Revaluation is not compulsory annually for items of property, plant and equipment carried out at revaluation model. Instead
revaluation is only required whenever there is a material differences between fair value and carrying amount. [Para 34]
11) As the land is not depreciated in normal circumstances therefore its surplus is transferred at the time of disposal.

Page 5 of 38
Q.1 Faraday Pharmaceutical Limited (FPL) acquired a building for Rs. 200 million on July 1, 2005. The following information relating to the
building is available:
1) It is being depreciated on the straight line basis, over 20 years.
2) FPL uses the revaluation model for subsequent measurement of its property, plant and equipment and accounts for revaluations
on the *net replacement value method. The details of revaluation carried out by the independent valuer during the past years
are as follows:
Revaluation date Fair value
Rupees in million
July 1, 2006 230
July 1,2007 170
July 1, 2008 180
3) FPL transfers the maximum possible amount from the revaluation surplus to retained earnings on an annual basis.
4) There is no change in the useful life of the building.
Required:
a) Prepare the journal entries to record the above transactions from the date of acquisition of the building to the year ended June
30, 2009.
b) Prepare following ledgers for all relevant years.
 Building Account
 Accumulated Depreciation Account
 Revaluation Surplus Account
*Net replacement value method simply means eliminate the existing accumulated depreciation against cost.
Q.2 Following information is available to you

1) Cost of plant is Rs. 360,000 purchased on 1 July 2009.

2) It is depreciated on straight line basis over a period of 10 years.
3) Detail of revaluation was as follows
Revaluation Date FV
1 July 2010 400,000
1 July 2011 280,000
1 July 2012 290,000
Required: Prepare following ledgers from the date of purchase upto the year ended 30-6-2013.
a) Plant Account
b) Accumulated Depreciation Account
c) Revaluation Surplus Account

Q.3 Awesome Industries Limited (AIL) manufactures components for textile machinery. It purchased a plant on 1 July 2008 at a cost of Rs.
200 million. It has an estimated useful life of five years and no residual value.
AIL revalues its plant on an annual basis. The details of revaluations performed by Supreme
Valuation Service, an independent firm of valuer, are as follows:

Fair value - 1 July 2009 Rs. 180 million

Fair value - 1 July 2010 Rs. 108 million
Fair value - 1 July 2011 Rs. 88 million

Required:
Prepare journal entries for the year ended 30 June 2009, 2010, 2011 & 2012.

Q.4 MWL is a listed company and is engaged in the business of purifying and marketing of bottled water.
MWL purchased a bottling plant on 1-7-2006 at a cost Rs 90 million. The plant has a useful life of 10 years with no residual value.
Deprecation is charged on straight line method over plants’ useful life. MWL revalues its plant at the end of every two years.
The revalued amounts determined by Jet Values, an independent firm of valuers are as follows
i. On 30-6-2008 : Rs 64 million
ii. On 30-6-2010 : Rs 60 million
However there was no change in the expected useful life and residual value of the plant since the purchase of bottling plant

Required:
Prepare the relevant accounting entries up to the year end 30-6-2011 from the date of purchase of Bottling Plant

Page 6 of 38
 Important Points to remember
Entry of elimination of accumulated depreciation On the date of revaluation

Depreciation on revalued amount (FV) After revaluation on the basis of remaining life

Transfer of surplus After revaluation in the periods in which depreciation is

charged on the basis of revalued amount.

Disclosures of property, plant and equipment:

 Schedule of PPE.
 Measurement basis
 Useful life / rate of depreciation
 Method of depreciation
 Detail of disposal of an item of PPE.
Disclosure requirements if an item of property, plant and equipment is revalued.
When items of property, plant and equipment are stated at revalued amounts the following must be disclosed:
 The effective date of the revaluation (if there are more than one revaluation dates then the latest date);
 Whether an independent valuer was involved and its name if available;
 For each revalued class of property, plant and equipment, the carrying amount that would have been recognised had
the asset been carried under the cost model; and
 The revaluation surplus, indicating the change for the period and any restrictions on the distribution of the balance to
shareholders.
Point to remember:
Revaluation surplus is presented in other comprehensive income in statement of comprehensive income.
Solutions:
A.1 Faraday
a) Journal Entries
Debit Credit
Date Particulars
Rs. in,000 Rs. in,000
1-Jul-05 Building 200,000
Bank 200,000
(Record purchase of plant)
30-Jun-06 Depreciation 10,000 10,000
Accumulated depreciation – Building
(Record depreciation for the year 2005-6)
Working: Rs. 200,000 20 = Rs. 10,000
1-Jul-06 Accumulated depreciation – Building 10,000
Building 10,000
(Reversal of prior year depreciation)
1-Jul-06 Building 40,000
Surplus on revaluation of fixed assets 40,000
(Increase in value through revaluation)
Working: Rs. 230,000 - Rs. 190,000 = Rs. 40,000
30-Jun-07 Depreciation 12,105
Accumulated depreciation - Building 12,105
(Record depreciation for the year 2006- 7)
Working: Rs. 230,000 19 = Rs. 12,105
30-Jun-07 Surplus on revaluation of fixed assets 2,105
Retained earnings/Profit & loss account 2,105
(transfer of surplus through retained earning to the extent of excess
depreciation)

Page 7 of 38
 Working: Rs. 40,000 - 19 = Rs. 2,105
l-Jul-07 Accumulated depreciation - Building 12,105
Building 12,105
(Reversal of prior year depreciation)
l-Jul-07 Surplus on revaluation of fixed assets 37,895
Revaluation expense 10,000
Building 47,895
(Decrease in value through revaluation)
Working:
Reversal of Surplus balance (Rs. 40,000 - Rs. 2,105) Rs. 37,895.
Balancing figure of Rs. 10,000 charged to Profit and Loss
Building value decline: (Rs. 230,000 - Rs. 12,105) - Rs. 170,000 =Rs. 47,895
30-Jun-08 Depreciation 9,444
Accumulated depreciation - Building 9,444
(Record depreciation for the year 2007-8)
Working: Rs. 170,000 18 = Rs. 9,444
l-Jul-08 Accumulated depreciation - Building 9,444
Building 9,444
(Reversal of prior year depreciation)
l-Jul-08 Building 19,444
Reversal of Revaluation Loss 9,444
Surplus on revaluation of fixed assets (balancing) 10,000
(Reversal of prior year Revaluation Loss)
Working:
Revaluation income = Rs. 10,000 - [ Rs. 10,000 - Rs. 9,444] = Rs. 9,444
Building: [Rs. 170,000 - Rs. 9,444] - Rs. 180,000 =Rs. 19,444
30-Jun-09 Depreciation 10,588
Accumulated depreciation - Building 10,588
(Record depreciation for the year 2007-8)
Working: Rs. 180,000 17 = Rs. 10,588
30-Jun-09 Surplus on revaluation of fixed assets 588
Retained earnings 588
(Reverse the excess depreciation)
Working: Rs. 10,000 17 = Rs. 588

b)
Ledger Accounts
Building (cost)
Bank 200,000,000
C/D 200,000,000
B/D 200,000,000 Acc Dep 10,000,000
Revaluation 40,000,000
Surplus
C/D 230,000,000
B/D 230,000,000 Acc Dep 12,105,263
Revaluation Surplus 37,894,737
Revaluation Loss 10,000,000
C/D 170,000,000
B/D 170,000,000 Acc Dep 9,444,444
Revaluation 10,000,000
Surplus (W-1)
Reversal of Loss 9,444,444
C/D 180,000,000

Page 8 of 38
 Accumulated Depreciation
C/D 10,000,000 Depreciation 10,000,000
(200 ÷ 20)
Building 10,000,000 B/D 10,000,000
C/D 12,105,263 Depreciation 12,105,263
(230 ÷ 19)
Building 12,105,263 B/D 12,105,263
C/D 9,444,444 Depreciation 9,444,444
(176 ÷ 18)
Building 9,444,444 B/D 9,444,444
C/D 10,588,235 Depreciation 10,588,235
(180 ÷ 17)

Revaluation Surplus

- -
R/E 2,105,263 Building 40,000,000
C/D 37,894,737
Building 37,894,737 B/D 37,894,737
C/D -
R/E 588,235 B/D -
C/D 9,411,765 Building 10,000,000

The amount of transfer of surplus can also be calculated as the difference between depreciation based on revalued amount and the
asset’s cost. Therefore sometimes in questions, words “incremental depreciation on account of revaluation” will have same meaning
i.e transfer that amount from revaluation surplus to retained earnings.

A.2
Answer
Plant
1-7-2009
Cash 360,000
C/D 360,000
B/D 360,000 Acc Depreciation 36,000
Revaluation Surplus 76,000
C/D 400,000
B/D 400,000 Acc Depreciation 44,444
Revaluation Surplus 67,556
Revaluation Loss 8,000
C/D 280,000
B/D 280,000 Acc Depreciation 35,000
Reversal of loss (W-1) 7,000
Revaluation Surplus 38,000
C/D 290,000

Accumulated Depreciation
Depreciation 36,000
C/D 36,000
Plant 36,000 B/D 36,000
Depreciation 44,444
C/D 44,444

Page 9 of 38
 Plant 44,444 B/D 44,444
Depreciation 35,000
C/D 35,000
Plant 35,000 B/D 35,000
Depreciation 41,429
C/D 41,429

Revaluation Surplus
Retained Earnings 8,444 Plant 76,000
C/D 67,556
Plant 67,556 B/D 67,556
C/D -
Retained Earnings 5,429 B/D -
Plant 38,000
C/D 32,571

A.3
Awesome Industries
1-7-2008
Plant 200 M
Cash 200 M
30-6-2009
Depreciation 40 M
Acc Depreciation 40 M (200 M ÷ 5)
1-7-2009
Acc Depreciation 40 M
Plant 40 M
1-7-2009
Plant 20 M
Revaluation Surplus 20 M (180- 160)
30-6-2010
Depreciation 45 M
Acc Depreciation 45 M (180M÷4)
30-6-2010
Revaluation Surplus 5M
Retained Earnings 5M (20M÷4)
1-7-2010
Acc Depreciation 45 M
Plant 45M
1-7-2010
Revaluation Surplus 15 M
Revaluation Loss 12 M
Plant 27 M [(180 – 45) -108]
30-6-2011
Depreciation 36 M
Acc Depreciation 36 M (108÷3)
30-6-2011
No transfer as no surplus

Page 10 of 38
 1-7-2011
Acc Depreciation 36 M
Plant 36 M
1-7-2011
Plant 16 M
Revaluation Surplus 8M
Reversal of loss 8M

30-6-2012 Depreciation 44 M
Acc depreciation 44 M (88÷2)

30-6-2012 Revaluation Surplus 4M

Retained Earning 4M (8÷2)

A.4

Solution
MWL
Journal Entries
1-7-2006 Rs 000 Rs 000
Plant 90,000
Cash/Bank 90,000
30-6-2007
Depreciation 9,000
Acc Depreciation 9,000
(90,000÷10)
30-6-2008
Depreciation 9,000
Acc Depreciation 9,000
30-6-2008
Acc Depreciation 18,000
Plant 18,000
30-6-2008
Revaluation Loss 8,000
Plant 8,000
(WDV (90,000 – 18,000) = 72,000
FV = 64,000)
30-6-2009
Depreciation 8,000
Acc Depreciation 8,000
(64,000÷8)
30-6-2010
Depreciation 8,000
Acc Depreciation 8,000
30-6-2010
Acc Depreciation 16,000
Plant 16,000
30-6-2010 Plant 12,000
Reversal of loss (W-1) 6,000
Revaluation Surplus (W-1) 6,000

Page 11 of 38
 30-6-2011
Depreciation 10,000
Acc Depreciation 10,000
(60,000÷6)
30-6-2011
Revaluation Surplus 1,000
Retained Earning 1,000
(6000 ÷ 6)

Self-Test Questions (Revaluation)

Q.1
Rupees
Cost of machine at 1/1/20X1: 100,000
Fair value
• 1/1/20X2 180,000
• 1/1/20X3 60,000
• 1/1/20X4 77,000
• 1/1/20X5 120,000
Depreciation: 10% per annum to a nil residual value
The company’s policy is to transfer the realized portion of the revaluation surplus to retained earnings as the asset is used.
Required:
Prepare the asset’s account as a net carrying amount account (i.e. do not prepare separate cost and accumulated depreciation
accounts) as well as revaluation surplus accounts for the year ended 31-12-2001 to 31-12-2005.

Q.2 A company always revalues its fixed assets to fair value using net replacement vale method. Following information relates to
its specialized vehicle.

Date Rupees
Purchase price 1 July 2005 500,000
Fair value 1 January 2007 420,000
Fair value 1 January 2009 165,000

Useful life: five year

Required:
a) Journalize the above transaction from the date of Purchase to 31 December 2009
b) Prepare for the year ended 31 December 2009, Property plant and equipment schedule in notes to financial statements
(including comparative figures).

Page 12 of 38
 Solutions
Self-Test Questions (Revaluation)

A.1
Machinery Account – WDV
1-1-2001
Bank 100,000 Depreciation 10,000
C/D 90,000
B/D 90,000 Depreciation 20,000
Revaluation Surplus 90,000 (180,000 ÷ 9)
C/D 160,000
B/D 160,000 Revaluation Surplus 80,000
Revaluation Loss 20,000
Depreciation 7,500
(60,000 ÷ 8)
C/D 52,500
B/D 52,500 Depreciation 11,000
(77,000 ÷ 7)
Reversal of Loss (W-1) 17,500
Revaluation Surplus 7,000
C/D 66,000
B/D 66,000 Depreciation 20,000
(120,000 ÷ 6)
Revaluation Surplus (W-2) 54,000

C/D 100,000

W-1 WDV=52,500 W-2 WDV=66,000

HCA=70,000 FV=120,000
FV=77,000

Revaluation Surplus
1-1-2001 - -
C/D - B/D -
Retained Earnings 10,000 Machine 90,000
(90,000 ÷ 9)
C/D 80,000
Machine 80,000 B/D 80,000
C/D -
Retained Earnings 1,000 B/D -
(7,000÷7)
Machine 7,000
C/D 6,000
Retained Earnings 10,000 B/D 6,000
(60,000÷6)
Machine 54,000
C/D 50,000

Page 13 of 38
A.2

a) Journal Entries
1-7-2005
Vehicles 500,000
Bank 500,000
31-12-2003
Depreciation 50,000
Acc Depreciation 50,000
(500,000÷5 x6/12)
31-12-2006
Depreciation 100,000
Acc Depreciation 100,000
(500,000÷5)

1-1-2007
Acc Depreciation 150,000
Vehicle 150,000
1-1-2007
Vehicle 70,000
Revaluation Surplus 70,000
31-12-2007
Depreciation 120,000
Acc Depreciation 120,000
(420,000÷3.5)
31-12—2007
Revaluation Surplus 20,000
Retained Earnings 20,000
(70,000÷3.5)
31-12-2008
Depreciation 120,000
Acc Depreciation 120,000
31-12-2008
Revaluation Surplus 20,000
Retained Earnings 20,000
(70,000÷3.5)
1-1-2009
Acc Depreciation 240,000
Vehicle 240,000
1-1-2009
Revaluation Surplus 15,000
Vehicle 15,000
31-12-2009
Depreciation 110,000
Acc Depreciation 110,000
(165,000 ÷ 1.5)
31-12-2009
Revaluation Surplus 10,000
Retained Earnings 10,000
(15,000 ÷ 1.5)
Page 14 of 38
b)
Notes to Financial Statements
For the year ended 31-12-2009
Vehicles 2009 2008
Cost/Revalued Amount
Opening Balance 420,000 420,000
Revaluation Surplus/Loss (15000) -
Adjustment of revaluation (240,000) -
Closing Balance 165,000 420,000

Acc Depreciation
Opening Balance 240,000 120,000
Adjustment of revaluation (240,000) -
Depreciation for the year 110,000 120,000
Closing Balance 110,000 240,000
Carrying Amount 55,000 180,000

Page 15 of 38
Extra questions of revaluation
Question No. 1
On 1st January 2014 Omega Chemicals Limited (OCL) changed its valuation model from cost to revaluation for its buildings. The
following information pertains to its buildings as at 01-01-2014.

Estimated useful life Revalued amounts

Accumulated
as originally Cost as per valuation
depreciation
estimated report
------------------ Rs. In million ---------------
Factory buildings 20 years 100.00 37.50 52.00
Office buildings 25 years 164.50 26.32 149.94

As per the report of the professional valuer, the was no change in estimated useful life of the buildings:
On 1 July 2014, one of the office buildings was sold for Rs. 30 million. On 01-01-2014 written down value before valuation and
revalued amount of the sold building amounted to Rs. 27.72 million and Rs. 31.92 million respectively.
On 31 December 2014, factory buildings were revalued at Rs. 64 million where as there was no change in value of the office buildings.
OCL uses straight line method of depreciation which is charged from the date the asset is available for use upto the date of disposal.
Revaluation is to be accounted for by using net replacement value method.
Required:
In the light of the requirements of the international financial reporting standards, prepare accounting entries from the above
information for the year ended 31 December 2014. (17)
Question No. 2
Shahzad Textile Mills Limited (STML) purchased a plant for Rs. 500 million on 1 July, 2010. the plant has an estimated useful life of 10
years and no residual value.
STML uses revaluation model for subsequent measurement of its property, plant and equipment and accounts for revaluations on net
replacement value method. The details of revaluations performed by an independent firm of valuers are as follows:

Revaluation date Fair value

1 July 2011 Rs. 575 million
1 July 2012 Rs. 390 million
1 July 2013 Rs. 380 million

Required:
Prepare journal entries to record the above transactions from the date of acquisition of the plant to the year ended 30 June 2014.
(Ignore tax implications) (15)
Question 3
PQR Enterprises was incorporated on 1 July 2012. The company depreciates its property, plant and equipment on straight line basis
over their useful life. It uses revaluation model for subsequent measurement of the property, plant and equipment and has a policy of
revaluing these after every two years.
Following information pertains to its property, plant and equipment:

Value as determined
Cost as on 01- WDV as on
by professional valuer Useful life in years
07-2013 01-07-2013
on 30-06-2014
Assets
Remaining as
Original at
-------------- Rs. In million ------------------ determined by
acquisition
valuer
Office building 6,000 5,500 5,750 12 8
Factory building 4,400 3,960 3,320 10 9
Warehouse 4,500 4,050 3,350 10 8

Page 16 of 38
During the year there were no addition or deletion in the above assets.
As per policy, PQR transfers the maximum possible amount from the revaluation surplus to retained earnings on an annual basis.
Required:
Prepare necessary journal entries for the year ended 30 June 2014 and 2015. (12)
Question 4
The following information pertains to Sherdil Limited (SL):
(i) Buildings and equipment were acquired on 1 January 2014 for Rs. 450 million and Rs. 50 million respectively.
(ii) The relevant information relating to both assets is summarised below:

Subsequent
Assets Depreciation method Life/rate
measurement
Buildings Straight line 20 years Annual revaluation
Equipment Reducing balance 10% Cost

SL transfers the maximum possible amount from revaluation surplus to retained earnings on an annual basis.
(iii) The revalued amount of buildings as determined by Accurate Valuers (Private) Limited, an independent valuation company, on
1 January 2015 and 2016 was Rs. 456 million and Rs. 378 million respectively.
(iv) Equipment costing Rs. 35 million was purchased on 1 August 2015. Half of the equipment purchased on 1 January 2014 was
disposed off on 30 June 2016.
Required:
Prepare Building A/c and Equipment A/c as well as separate ledgers for accumulated depreciation for the year ended 31-12-2015 and
31-12-2016.
Question 5
The following information pertains to Sherdil Limited (SL):
(i) Buildings and equipment were acquired on 1 January 2014 for Rs. 450 million and Rs. 50 million respectively.
(ii) The relevant information relating to both assets is summarised below:

Subsequent
Assets Depreciation method Life/rate
measurement
Buildings Straight line 20 years Annual revaluation
Equipment Reducing balance 10% Cost

SL transfers the maximum possible amount from revaluation surplus to retained earnings on an annual basis.
(iii) The revalued amount of buildings as determined by Accurate Valuers (Private) Limited, an independent valuation company, on
1 January 2015 and 2016 was Rs. 456 million and Rs. 378 million respectively.
(iv) Equipment costing Rs. 35 million was purchased on 1 August 2015. Half of the equipment purchased on 1 January 2014 was
disposed off on 30 June 2016.
Required:
In accordance with International Financial Reporting Standards, prepare a note on ‘Property plant & equipment’ (including
comparative figures) for inclusion in SL’s financial statements for the year ended 31 December 2016. (18)
Question No. 6
Abid Limited (AL) uses the revaluation model for subsequent measurement of its property, plant and equipment and has a policy of
revaluing its assets on an annual basis using the net replacement value method.
The following information pertains to AL’s buildings:
(i) Four buildings were acquired in same vicinity on 1 January 2012 at a cost of Rs. 300 million. The useful life of the buildings on
the date of acquisition was 20 years.

(ii) AL depreciates buildings on the straight line basis over their useful life.

Page 17 of 38
(iii) The results of revaluations carried out during the last three years by premier Valuation Service, an independent firm of
valuers, are as follows:

Fair value
Revaluation date
Rs. In million
1 January 2013 323
1 January 2014 252
1 January 2015 272
(iv) On 30 June 2015, one of the buildings was sold for Rs. 80 million.

Required:
Prepare a note on “property, plant and equipment” (including comparative figures) for inclusion in AL’s financial statements for the
year ended 31 December 2015 in accordance with International Financial Reporting Standards. (Ignore taxation) (13)
Solution:
Answer No. 1
Omega Chemicals Limited
Accounting entries for the year ended 31 December 2014

Debit Credit
Date Description
Rs. ‘000’ Rs. ‘000’
Factory buildings
1-1-2014 Accumulated depreciation - Factory buildings 37.50
Factory buildings 37.50
(Reversal of accumulated depreciation on revaluation of factory
buildings on 31 December 2013)
1-1-2014 Revaluation loss [52 – (100 – 37.5) 10.50
Factory buildings 10.50
(2013 Revaluation loss of factory buildings accounted for in
2014)
31-Dec-2014 Depreciation expense (52 ÷ 12.5 W-1) 4.16
Accumulated depreciation – Factory buildings 4.16
(Depreciation expenses for the year ended 31 December 2014)
31-Dec-2014 Accumulated depreciation – Factory buildings 4.16
Factory buildings 4.16
(Reversal of accumulated depreciation on revaluation of factory
buildings on 31 December 2014)
31-Dec-2014 Factory buildings [64 – (52 – 4.16)] 16.16
Reversal of revaluation loss [10.5-(10.55÷12.5W-1)] 9.66
Revaluation surplus – factory buildings (Bal.) 6.50
(revaluation of factory buildings on 31 December 2014 and
reversal of previous revaluation loss).
Office buildings
1-1-2014 Accumulated depreciation 26.32
Office building 26.32
1-1-2014 Office building 11.76
Revaluation surplus [149.94 – (164.5 – 26.32)] 11.76

Page 18 of 38
1-Jul-2014 Depreciation expense [31.92 5 ÷ 21 × 0.5] 0.76
Accumulated depreciation-Office buildings 0.76
(Depreciation expenses for the six months ended 1 July 2014 for
the office building block sold)
1-Jul-2014 Revaluation surplus [(31.92-27.72=4.2) 5 ÷ 21 × 0.5] 0.10
Retained earnings 0.10
(Transfer of incremental depreciation for the six months ended
31 December 2014 to retained earnings)
1-Jul-2014 Bank 30.00
Accumulated depreciation 0.76
Loss on sale of Office building (bal) 1.16
Office buildings 31.92
(Sale of office building)
1-Jul-2014 Revaluation surplus 4.1
Retained earnings 4.1
(4.2 - 0.1)
31-Dec-2014 Depreciation expense (149.94 – 31.92) ÷ 21 5.62
Accumulated depreciation-Office buildings 5.62
(Depreciation expenses for the year ended 31 December 2014)
31-Dec-2014 Revaluation surplus-Office building [149.94-(164.5-26.32)- 0.36
4.21÷21
Retained earnings 0.36
(Transfer of incremental depreciation for the year ended 31
December 2014 to retained earnings)
(W-1: Remaining useful life of the buildings on the revaluation date of 31 December 2013

Years

100 37 .5 
Factory buildings:   5;  7.5; 20  7.5  12 .5 12.50
 20 5 

164.5 26.32 
Office buildings:   6.58;  4; 25  4  21 21.00
 25 6.58 

Answer No. 2
“Rs. In Million”
Date Particulars
Debit Credit
1-7-2010 Plant 500
Bank 500
10-6-2011 Depreciation 50
Accumulated depreciation (500 ÷ 10) 50
1-7-2011 Accumulated depreciation 50
Plant 50
1-7-2011 Plant 125
Revaluation Surplus 125
30-6-2012 Depreciation 63.89
Accumulated depreciation [575/9] = 63.89 63.89
30-6-2012 Revaluation Surplus 13.89
Page 19 of 38
 Retained Earnings [125/9] = 13.89 13.89
1-7-2012 Accumulated depreciation 63.89
Plant 63.89
1-7-2012 Revaluation Surplus 111.11
Revaluation Loss 10
Plant 121.11
WDV = 575 – 63.89 = 511.11
FV = 390.00
30-6-2013 Depreciation 48.75
Accumulated depreciation [390÷8] = 48.75 48.75
1-7-2013 Accumulated depreciation 48.75
Plant 48.75
1-7-2013 Plant 38.75
Reversal of Loss [10 – 1.25 (10/8)] 8.75
Rev. Surplus 30.00
WDV = 390 – 48.75 = 341.25
FV = 380.00
38.75
30-6-2014 Depreciation 54.29
Accumulated depreciation [380÷7] = 54.29 54.29
30-6-2014 Rev. Surplus 4.29
Retained Earnings [30÷7] = 4.29 4.29

Answer No. 3
PQR
Journal Entries for the year ended 30-6-2014
Office Buildings:

30-6-14 Depreciation 500 (6,000 ÷ 12)

Accumulated depreciation 500
30-6-14 Accumulated depreciation 1,000 (500 + 500)
Office building 1,000
30-6-14 Office building 750
R. Surplus 750
WDV = 5,500 – 500 = 5,000
FV = 5,750
Factory Buildings:
30-6-14 Depreciation 440 (4,400 ÷ 10)
Accumulated depreciation 440
30-6-14 Accumulated depreciation 880 (440 + 440)
Factory building 880
30-6-14 Revaluation Loss 200
Factory building 200
WDV = 3,960 – 440 = 3,520
FV = 3,320
200

Page 20 of 38
Warehouse:
30-6-14 Depreciation 450 (4,500 ÷ 10)
Accumulated depreciation 450
30-6-14 Accumulated depreciation 900 (450 + 450)
Warehouse 900
30-6-14 Revaluation Loss 250
Warehouse 250
WDV = 4,050 – 450 = 3,600
FV = 3,350
250
Journal Entries for the year ended 30-6-2015
Office Buildings:

30-6-15 Depreciation 718.75 (5,750 ÷ 8)

Accumulated depreciation 718.75
30-6-15 Revaluation Surplus 93.75 (750 ÷ 8)
Retained Earnings 93.75
Factory Buildings:
30-6-15 Depreciation 369 (3,320 ÷ 9)
Accumulated depreciation 369
Warehouse:
30-6-15 Depreciation 419 (3,350 ÷ 8)
Accumulated depreciation 419
Ans. 4
Buildings
1-1-2014 Cash 450
c/d 450
1-1-2015 b/d 450 1.1.2015 Acc. Depreciation 22.5
1-1-2015 R.S 28.5
c/d 456
1-1-2016 b/d 456 1.1.2016 Acc. Depreciation 24
1.1.2016 R.S 27
1.1.2016 R.L 27
c/d 378
Accumulated Depreciation
31-12-2014 Depreciation (450÷20) 22.5
c/d 22.5
1.1.2015 Building 22.5 1.1.2015 b/d 22.5
31.12.2015 Depreciation (456÷19) 24
c/d 24
1.1.2016 Building 24 1.1.2016 b/d 24
31.12.2016 Depreciation (378÷18) 21
c/d 21

Page 21 of 38
 R.S
31.12.2015 Retained earnings (28.5÷19) 1.5
1.1.2015 Building 28.5
c/d 27
1.1.2016 Building 27 1.1.2016 b/d 27
c/d -
(W-1) 1-1-2015
WDV = 450 – 22.5 = 427.5
FV = 456
R. Surplus = 28.5
1-1-2016
WDV = 456 – 24 = 432
FV = 378
R. Loss = 54

R. Surplus 27
R. Loss (balance) 27
Building 54

(b) Equipment

1-1-2014 Cash 50
31-12-2014 c/d 50
b/d 50
1-8-2015 Cash 35
31-12-2015 c/d 85
b/d 85 30-6-2016 Disposal 25
c/d 60
Accumulated Depreciation

31-12-2014 Depreciation (50×10%) 5

c/d 5
01.01.2015 b/d 5
31.12.2015 Depreciation 5.96
(50-5)×10% + 35 × 10% ×
5/12
c/d 10.96
01.01.2016 b/d 10.96
30.06.2016 Disposal 5.7625 31.12.2016 Depreciation 6.3915
[25×10%] = 2.5 [85-10.96-20.25]×10%
[25-2.5]×10% = 2.25 + 20.25×10%×6/12
[25-2.5-2.25]×10%× 6/12 = [5.379 + 1.0125]
1.0125
c/d 11.58

Page 22 of 38
Answer 5
Property, plant and equipment

2016
Building Equipment Total
-------- Rs. In million ---------
Gross carrying amount
Opening 456.00 85.00 541.00
Elimination (24.00) (24.00)
Revaluation surplus [28.5 – (28.5 ÷ 19)] (27.00) (27.00)
Revaluation loss (27.00) (27.00)
Disposal (25.00) (25.00)
Closing 378.00 60.00 438
Accumulated depreciation
Opening 24.00 10.96 34.96
Elimination (24.00) (24.00)
Disposal [2.5 + 2.25 + 1.01] (5.76) (5.76)
Depreciation
(378÷18) 21.00 21.00
[(74.04-20.25)×10% + (20.25×10%×6÷12)] 6.39 6.39
Closing 21.00 11.59 32.59
Carrying amount [378 – 21] 357.00 48.41 405.41
[60-11.59]

Property, plant and equipment

2015
Building Equipment Total
-------- Rs. In million ---------
Gross carrying amount
Opening 450.00 50.00 500.00
Elimination (22.50) (22.50)
Revaluation 28.50 28.50
Addition 35.00 35.00
Closing Cost 456.00 85.00 541.00
Accumulated depreciation
Opening 22.50 5.00 27.50
Elimination (22.50) (22.50)
Disposal
Depreciation
(456÷19) 24.00 24.00
[(45×10%) + (35×10%×5÷12)] 5.96 5.96
Closing 24.00 10.96 35.96
Closing amount (456 – 24] 432.00 74.04 506.04
[85-10.96]

Page 23 of 38
Disclosures related to property, plant and equipment:
Buildings Equipment
Measurement base Revaluation model Cost model
Useful life/depreciation rate 20 years 10%
Depreciation method Straight line Reducing balance
Disclosures regarding revaluation of buildings:
1.The last revaluation was performed on 1 July 2016.
2.The revaluation was performed by Accurate Valuers (private) Limited, an independent
firm of valuers.
3.Carrying value had the cost model been used.
2016 2015
Buildings 382.50 405.00
[450 – (22.5 x 2)] [450 – (22.5 x 3)]
4. Change in revaluation surplus:
2016 2015
Opening balance 27 -
Revaluation (27) 28.5
Transfer of surplus - (1.5)
Closing balance - 27
There is restriction on distribution of revaluation surplus as dividend to shareholders.

Detail of Disposal of Equipment:

Gross carrying amount 25

Accumulated Depreciation (5.7625)
Carrying Amount 19.2375
Sale proceeds Not Available
Mode of Disposal Not Available
Particulars of buyer Not Available
Answer No. 6
Abid Limited
Note of Property, Plant & Equipment :
For the year ended 31-12-2015
Rs. In Millions
2015 2014
Gross carrying amount:
Opening balance 252 323
Addition/Disposal (68) --
Elimination (14) (17)
Revaluation 34 (54)
Closing balance 204 252
Accumulated Depreciation
Opening balance 14 17
Elimination (14) (17)
For the year 14 14
Disposal (2) --
Closing balance 12 14
Carrying amount 192 238

Page 24 of 38
Useful life 20 years 20 years

Disclosures of Revaluation:
The revaluation was performed on 1-1-2015 by M/s Premies Valuatin Services, an independent firm of valuers. Revaluations are
performed annually. The carrying amount of buildings had they were carried at cost model would have been:
31-12-2014 = 300 – (15 × 3) = 255
31-12-2015 = 225* - 45** = 180
* [300 – 75] = 225
** [225 ÷ 20 × 4] = 45

Detail of Disposal of building:

Gross carrying amount (272 ÷ 4) 68
Accumulated Depreciation (68 ÷ 17 × 6/12) = 2
Carrying Amount 66
Sale proceeds 80
Mode of Disposal Not Available
Particulars of buyer Not Available

Workings: (Ledgers; not required in exam but for calculation of figures)

Building A/c
2012
Cash 300
c/d 300
b/d 300 Accumulated depreciation 15
Revaluation surplus (285 – 323) 38
c/d 323
b/d 323 Accumulated depreciation 17
Revaluation surplus 36
R. Loss 18
c/d 252
b/d 252 Accumulated depreciation 14
Reversal of loss 17 Disposal (W-2) 68
Revaluation surplus (W-1) 17
c/d 204

Accumulated Depreciation
Depreciation (300 ÷ 20) 15
c/d 15
Building 15 b/d 15
Depreciation (323 ÷ 19) 17
c/d 17
Building 17 b/d 17
Depreciation (252 ÷ 18) 14
c/d 14
Building 14 b/d 14
Disposal 2 Depreciation (W-3) 14
c/d 12

Page 25 of 38
Revaluation Surplus

Retained earnings (38 ÷ 19) 2 b/d --

Building 38
c/d 36
Building 36 b/d 36
c/d --
Retained earnings (W-4) 0.875 b/d --
Retained earnings (4.25 – 0.125) 4.125 Building 17
c/d (4 × 3) 12

Workings:
1) 01.01.2015
WDV = 238
FV = 272

R. Surplus = 34

Reversal of loss 18 R. Surplus 17

Extra depreciation to be charged (15 x 1) (1)
Net reversal of loss 17
(2) FV of Building Disposed:

272/4 = 68
(3) Depreciation for the year:

[272 – 68] ÷ 17 = 12
[68 ÷ 17 × 6/12] = 2
(4) Transfer of Surplus:

17/4 = 4.25 per building; 17 - 4.25 = 12.75 ÷ 17 = 0.75; 4.25/17 x 6/12 = 0.125; total 0.75 + 0.125 =0.875

Page 26 of 38
ICAP study text
IAS 16: Property, plant and equipment
DISCLOSURE REQUIREMENTS OF IAS 16

IAS 16 Property, plant and equipment requires the following disclosures in the notes to the financial statements, for each major
class of property, plant and equipment.

The measurement bases used (cost or revaluation model)

The depreciation methods used

The useful lives or depreciation rates used

Gross carrying amount (means cost or revalued amount) and the accumulated depreciation at the beginning and at the end
of the period

A reconciliation between the opening and closing values for gross carrying amounts and accumulated depreciation,
showing:
i. additions during the year
ii. disposals during the year
iii. depreciation charge for the year

iv. impairment losses

v. the effect of revaluations.

An entity must also disclose:


the existence and amounts of restrictions on title, and property, plant and equipment pledged as security
for liabilities;

the amount of expenditures recognised in the carrying amount of an item of property, plant and equipment in
the course of its construction;

the amount of contractual commitments for the acquisition of property, plant and equipment; and

if it is not disclosed separately in the statement of comprehensive income, the amount of compensation from
third parties for items of property, plant and equipment that were impaired, lost or given up that is included
in profit or loss.

Disclosures for assets stated at revalued amounts

When items of property, plant and equipment are stated at revalued amounts the following must be disclosed:
I.
the effective date of the revaluation;
II.
whether an independent valuer was involved;

III.
for each revalued class of property, plant and equipment, the carrying amount that would have been recognised had the
assets been carried under the cost model; and
IV.
the revaluation surplus, indicating the change for the period and any restrictions on the distribution of the balance to
shareholders.

Additional disclosures encouraged by IAS 16

IAS 16 encourages disclosure of the following information as users of financial statements might find it to be useful.
I.
the carrying amount of temporarily idle property, plant and equipment;
II.
the gross carrying amount of any fully depreciated property, plant and equipment that is still in use;
III.
the carrying amount of property, plant and equipment retired from active use and held for disposal; and

IV. when the cost model is used, the fair value of property, plant and equipment when this is materially different from the
carrying amount.

Page 27 of 38
Further Practice:
Example 01: ALI LIMITED

Question: Ali Limited (AL) uses the revaluation model for subsequent measurement of its property, plant and equipment
and has a policy of revaluing its assets on an annual basis using the net replacement value method.
The following information pertains to AL’s building:
i. The building was purchased on 01 January 2010 for Rs. 2 hundred million with expected usefullife of
ten years.
ii. AL depreciates buildings on the straight line basis over their useful life.
iii. The results of revaluations carried out during the last three years by Standard Valuation Service,an
independent firm of values, are as follows:

Revaluation date Fair value Rs. in million

1 January 2011 280
1 January 2012 170
1 January 2013 180
Required:
The journal entries relating to the above transactions including revaluations for the year ended December 31, 2010,
2011, 2012 and 2013.

Answer:

Debit Credit
Date - Property, plant and equipment
---- Rs. in million ----
January Building Account 200
01,2010 Payable 200
December Depreciation (200÷10) 20
31,2010 Accumulated depreciation 20
January Accumulated depreciation 20
01,2011 Building 20
January Building (280-(200-20)) 100
01,2011 Revaluation surplus (OCI) 100
January Depreciation (200÷9) 31
31,2011 Accumulated depreciation 31
January Revaluation surplus (100/9) 11
31,2011 Retained earnings 11
January Accumulated depreciation 31
01,2012 Building 31
January Revaluation surplus (SOCI) (280-31)-170 79
01,2012 Building 79
December Depreciation (170÷8) 21.25
31,2012 Accumulated depreciation 21.25
December Revaluation surplus 1.25
31,2012 Retained earnings 1.25
(100-11-79)=10/8 =1.25
January Accumulated depreciation 21.25
01,2013 Building 21.25
January Building 31.25
01,2013 Revaluation surplus (180-(170-21.25) 31.25

Page 28 of 38
 December Depreciation (180÷07) 25.7
31,2013 Accumulated depreciation 25.7
December Revaluation surplus 5.7
31,2013 Retained earnings 5.7
(10-1.25+31.25)/7

Example 02: SUNDRY QUESTION 1

Question: The following are two independent scenarios:
1. A business purchased some land and buildings on 1 January 2011 for Rs.800million (landRs.250 million and buildings Rs.550
million). The buildings are to be depreciated over a period of 50 years.
On 1 January 2015 the land and buildings were revalued to Rs. 1,500 million (land Rs.400million and buildings Rs. 1,100 million).
At this date the buildings were believed to have a remaining useful life of 40 years.
Required:
What is the original depreciation charge for the buildings and the revised charge from 1January 2015?
Answer:
The original depreciation charge for the buildings and the revised charge from 1 January2015 are calculated as under:
Original depreciation = Rs.550 million /50 years = Rs.11 million Revised depreciation = Rs.1,100 million /40
years = Rs.27 million
2.A business purchased land for Rs.250 million and buildings for Rs.400 million on 1 January2011. The buildings were to be
depreciated over a period of 50 years. On 1 January 2015 the land was revalued to Rs.520 million and the buildings were
revalued at Rs.750 million.
Required:
What amount is to be taken to the revaluation reserve on 1 January 2015?
Answer:

Rs.m Rs.m
Land (520 - 250) 270
Buildings – cost 400
depreciation (400/50 x 4 years) (32)
Net book value 368
Revaluation 750
Transfer to revaluation reserve 382
Total revaluation surplus 652

Example 03: EHTISHAM

Question:
The following information relates to the financial statements of Ehtisham for the year to 31 March2015.
The head office of Ehtisham was acquired on 1 April 2012 for Rs. 1 million. Ehtisham intend to occupy the building for 25 years. On 31
March 2014 it was revalued to Rs. 1.15 million. On 31 March 2015,a surplus of vacant commercial property in the area had led to
a fall in property prices and the fair value was now only Rs. 0.8 million.
Required:
Explain the correct accounting treatment for the above (with calculations).
Answer:
IAS 16 permits assets to be carried at cost or revaluation. Where the latter is chosen, the asset mustbe stated at its fair value.

The original depreciation was Rs. 40,000 (Rs. 1,000,000/25 years) per annum.

Page 29 of 38
On 31st March 2014 the asset is two years old. Its carrying value before revaluation was therefore Rs.1million less accumulated
depreciation of Rs.80,000 (40,000 x 2).

Rs.
Cost/valuation 1,000,000
Accumulated depreciation (80,000)
Net book value 920,000
In order to effect the revaluation, the cost is uplifted to fair value of Rs.1.15m, the accumulated
depreciation is eliminated, and the uplift to the net book value is credited to a revaluation surplus
account.
Debit Credit
150,000
Building
Accumulated depreciation 80,000
Revaluation surplus 230,000

The impact of the journal is as follows:

Before Adjustment After

Cost/valuation 1,000,000 150,000 1,150,000
Accumulated depreciation (80,000) 80,000 nil
Carrying amount 920,000 1,150,000
The asset is depreciated over its remaining useful economic life of 23 years giving a charge of Rs.50,000
(Rs. 1,150,000/23 years) per annum in the year to 31st March 2015.
Debit Credit
Depreciation 50,000
Accumulated depreciation 50,000
This results in a carrying value as at 31st March 2015 of:
Rs.

Cost/valuation 1,150,000
Accumulated depreciation (50,000)
Carrying amount 1,100,000

Transfer from revaluation surplus to retained earnings

As a result of the revaluation, the annual depreciation has increased from Rs.40,000 to Rs.50,000.This extra depreciation
of Rs.10,000 is transferred from the revaluation reserve to accumulated profits each year.(or 230,000/23)
Debit Credit
Revaluation surplus 10,000
Retained earnings 10,000

By the 31st March 2015, the balance remaining on the revaluation reserve will be Rs.220,000.

Rs.
Surplus recognised at 31 March 2014 230,000
Transfer to accumulated profits (10,000)
Carrying amount 220,000

Page 30 of 38
The fall in property values at the year-end. The asset must be revalued downwards to Rs.0.8million, a write-down of
Rs.300,000.[1,100,000-800,000]

Rs.220,000 of this is charged against the revaluation reserve relating to this asset, and the remaining Rs.80,000
must be charged against profits.
The reduction of the carrying amount of the asset is achieved by removing the accumulated depreciation and
adjusting the asset account by the balance.

Debit Credit
Revaluation surplus 220,000
Revaluation Loss - Statement of profit or loss (Working - 1) 80,000
Asset at valuation 350,000
Accumulated depreciation 50,000

The impact of the journal is as follows:

Before Adjustment After

Cost/valuation 1,150,000 350,000 800,000

Accumulated depreciation (50,000) 50,000 Nil
Carrying amount 1,100,000 800,000

Example 04: CARLY

Question: The following is an extract from the financial statements of Carly on 31 December 2014.Property, plant and equipment

Land and Plant and Computer Total

buildings machinery equipment

Rs. Rs. Rs
Rs.

Cost
On 31 December 2014 1,500,000 340,500 617,800 2,458,300
Accumulated depreciation
On 31 December 2014 600,000 125,900 505,800 1,231,700

Carrying amount
On 31 December 2014 900,000 214,600 112,000 1,226,600

Accounting policies
Depreciation

Depreciation is provided at the following rates.

On land and buildings Over 50 years on straight line basis on buildings only
On plant and equipment 25% reducing balance
On computers 33.33% per annum straight line
During 2015 the following transactions took place.
(1) On 31 December the land and buildings were revalued to Rs. 1,750,000. Of this amount, Rs.
650,000 related to the land (which had originally cost Rs. 500,000). The remaining useful lifeof the
buildings was assessed as 40 years.
Page 31 of 38
 (2) A machine which had cost Rs. 80,000 and had accumulated depreciation of Rs. 57,000 at thestart of
the year was sold for Rs. 25,000 at the start of the year.
(3) A new machine was purchased on 30 April 2015. The following costs were incurred:
Rs.
Purchase price, before discount, inclusive of reclaimable sales tax of Rs.3,000 20,000
Trade Discount 1,000
Delivery costs 500
Installation costs 750
Interest on loan taken out to finance the purchase 300
(4) On 1 January it was decided to change the method of providing depreciation on computer
equipment from the existing method to 40% reducing balance.
Required:
Produce the analysis of property, plant and equipment as it would appear in the financial statementsof Carly for the year
ended 31 December 2015.
Answer:
Property, plant and Land and Plant and Computer Total
equipment buildings machinery equipment

Rs. Rs. Rs
Rs.

Gross Carrying amount

At 1 January 2015 1,500,000 340,500 617,800 2,458,300
Cancelation (620,000) (620,000)
Revaluation 870,000 - - 870,000
Additions (W2) - 17,250 - 17,150
Disposals - (80,000) - (80,000)
---------------------- ----------------------- ----------------------- -------------------
At 31 December 2015 1,750,000 277,750 617,800 2,645,550
----------------- ------------------- ------------------ ----------------
Accumulated depreciation
At 1 January 2015 600,000 125,900 505,800 1,231,700
Charge for the year (W1) 20,000 50,775 44,800 115,575
Cancelation (620,000) - - (620,000)
Disposals - (57,000) - (57,000)
--------------------- ----------------------- ---------------------- ------------------
At 31 December 2015 Nil 119,675 550,600 670,275
---------------- ------------------ -------------------- ----------------
Carrying amount
At 31 December 2014 900,000 214,600 112,000 1,226,600
------------------- ----------------------- --------------------- --------------------
At 31 December 2015 1,750,000 158,075 67,200 1,975,275
------------------- ---------------------- --------------------- -------------------

Workings:
(1) Depreciation charges
Buildings = (1,500,000 – 500,000) / 50 years = 20,000.

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 Plant and machinery:

New machine (17,250 (W 2) 25% 8/12) 2,875

Existing plant (((340,500 – 80,000) – (125,900 – 57,000)) 25%) 47,900
Total 50,775
Computer equipment = 112,000 40% = Rs.44,800

(2) Cost of new machine

Purchase price (20,000 – 3,000 – 1,000) 16,000

Delivery costs 500
Installation costs 750
TOTAL 17,250
It is not a qualifying asset so interest is not capitalized.

Example 05 : ADJUSTMENTS LIMITED

Question: Adjustments Limited has carried out a review of its non-current assets.
(a) A grinder was purchased on 1 January 2012 for Rs. 100,000. The plant had an estimated usefullife of ten years and a residual
value of nil. Depreciation is charged on the straight line basis. On1 January 2015, when the asset’s net book value is Rs. 70,000,
the directors decide that it would be more appropriate to depreciate this asset using the sum of digits’ approach. The
remaining useful life is unchanged.
(b) The company purchased a fifty year leased property some years ago for Rs. 1,000,000. This was being depreciated over its
life on a straight line basis. On 1 January 2015, when the net book value isRs. 480,000 and twenty-four years of the lease are
remaining, the asset is revalued to Rs. 1,500,000. This revised value is being incorporated into the accounts.
Required:
Explain the effects of these changes on the depreciation for the year to 31 December 2015.
Answer:
(a) The grinder was purchased in 2012 and was originally being depreciated on a straight line basis. Ithas now been decided to
depreciate this on the sum of digits basis.
IAS 16 requires that depreciation methods be reviewed periodically and if there is a significant changein the expected pattern of
economic benefits, the method should be changed. Depreciation adjustments should be made in current and future periods. This
change might be appropriate if, for instance, usage of the machine is greater in the early years of an asset’s life when it is still new
and consequently it is appropriate to have a higher depreciation charge.
If the change is implemented, the net book value of the asset should be depreciated over the remaining useful life commencing
with the period in which the change is made.
The depreciation charge for the remaining life of the asset will therefore be as follows.

Year Digits Depreciation

Rs.
2015 7 7/28 x Rs.70,000 17,500
2016 6 6/28 x Rs.70,000 15,000
2017 5 12,500
2018 4 10,000
2019 3 7,500
2020 2 5,000
2021 1 2,500
— ———–
7 (7 + 1)/2 — Rs. 70,000
28 ———–
—
—

Disclosure will need to be made in the accounts of the details of the change, including the effect on the charge in the year.

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 The reassessment of the depreciation method is not a change in accounting policy and neither rectification of a fundamental error
so the effects of the change will not affect the previously reportedfinancial statements
(b) Leasehold Property:
IAS 16 requires that the subsequent charge for depreciation should be based on the revalued amount. The annual depreciation will
therefore be Rs. 62,500, i.e. Rs.1,500,000 divided by the 24 years of remaining life.
There will then be a difference between the revalued depreciation charge and the historical depreciation charge.
The resulting excess depreciation may be dealt with by a movement in reserves, i.e. by transferring from the revaluation reserve to
retained earnings a figure equal to the depreciation charged on the revaluation surplus each year.

Example 07: SHAHWEZ LIMITED

Question: Shahwez Limited (SL) revalued its property on 1 April 2011 to Rs.20 million (Rs.8 millionfor the land). The property originally
cost Rs.10 million (Rs.2 million for the land) 10 years ago. The original useful life of 40 years is unchanged. SL’s policy is to make a
transfer to realised profits in respect of excess depreciation.
Required:

How will the property be reflected in the financial statements accounted for in the year ended 31 March 2012?

Answer:

Statement of comprehensive income extract for the year ended 31 March 2012

Depreciation expense
400
Other comprehensive income:

Revaluation gain 12,000

Statement of financial position extract as at 31 March 2012

Rs. In 000

Non-current assets Property 19,600

(20,000 – 400)

Equity Revaluation reserve 11,800

(12,000 – 200)

Statement of changes in equity extracts

Revaluation reserve Retained earnings

Revaluation surplus 12,000
Transfer of surplus (200) 200
Workings:
Gain on revaluation: Rs. In 000
Carrying value at revaluation date
(10,000 – ((10,000 – 2,000)/40 years x 10 years)) 8,000
Fair value 20,000
Gain on revaluation 12,000
Double entry:
Dr Property 10,000
(20,000 – 10,000)

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 Dr Accumulated depreciation 2,000
((10,000 – 2,000)/40 years x 10 years)
Cr Revaluation reserve 12,000
Depreciation charge for year to 31 March 2012:
Dr depreciation expense 400
((20,000 – 8,000)/30 years)
Cr Accumulated depreciation 400
Transfer of surplus:
Historical cost depreciation charge 200
((10,000 – 2,000)/40 years)
Revaluation depreciation charge 400
Excess depreciation to be transferred 200
Dr Revaluation reserve 200
Cr Retained earnings 200

Example 07: HAMZA LIMITED

Question: Hamza Limited (HL) acquired a building on 1 April 2011 for Rs. 100,000 at which point it was considered to have a useful
life of 40 years. At the year-end 31 March 2016, HL decided torevalue the building to its current value of Rs. 98,000.
Required:
How will the building be accounted for (means extracts of financial statements) in the year ended 31 March 2016?
Answer:

Statement of comprehensive income extract 31 March 2016

Depreciation charge (100,000/40) 2,500
Other comprehensive income:
10,500
Revaluation surplus

Statement of financial position extract 31 March 2016

98,000
Building at valuation

Statement of changes in equity extract

Revaluation gain
Revaluation reserve 10,500
Notes:
Revaluation takes place at year end, therefore a full year of depreciation must first be charged.
(W1) Depreciation year ended 31 March 20X6
100,0000 / 40 years = Rs.2,500 per annum

(W2) Revaluation as at 31 March 20X6

Carrying value of non-current asset at revaluation date
(100,000 – (100,000/40 years x 5 years)) 87,500
Valuation of non-current asset 98,000
Gain on revaluation 10,500
Double entry: Debit Credit
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Accumulated depreciation 12,500
Building 2,500
Revaluation reserve 10,500
Example 09: SUNDRY QUESTION 2
Question:
(a) When the asset should be derecognised from the balance sheet? What is the accounting treatment for gain or loss on
disposal for revaluation model?
(b) What is the disclosure requirement of asset carried at revalued amount???
Answer:
(a). Property, Plant and Equipment should be derecognised (removed from PPE) either;
i. on disposal (sold or exchanged etc. by cash for asset given up) or
ii. when it is withdrawn from use and no future economic benefits are expected from the asset (in other words, it is
effectively scrapped).
A gain or loss on disposal is recognised as the difference between the disposal proceeds (gross proceeds received minus cost of
making sale) and the carrying value of the asset (using the cost or revaluation model) at the date of disposal. This net gain is included in
thestatement of profit or loss. The sales proceeds should not be recognised as revenue.

Where assets are measured using the revaluation model, any remaining balance in the revaluation reserve relating to the asset
disposed of is transferred directly to retained earnings. No recycling of this balance into the statement of profit or loss is permitted.

(b) General disclosures

The financial statements shall disclose, for each class of property, plant and equipment:
a) the measurement bases used for determining the gross carrying amount;
b) the depreciation methods used;
c) the useful lives or the depreciation rates used;
d) the gross carrying amount and the accumulated depreciation (aggregated with
accumulated impairment losses) at the beginning and end of the period; and
e) a reconciliation of the carrying amount at the beginning and end of the period showing
increases or decreases resulting from revaluations from comparing its revalued amount to
the book value and recognize in other comprehensive income and accumulated in equity
under the heading of revaluation surplus. However, the revaluation increase shall be
recognised in profit or loss to the extent that it reverses arevaluation decrease of the same
asset previously recognised in profit or loss.
Specific disclosures
If items of property, plant and equipment are stated at revalued amounts, the followingshall be disclosed:
i. the effective date of the revaluation;
ii. whether an independent valuer was involved;
iii. for each revalued class of property, plant and equipment, the carrying amount that
would have been recognised had the assets been carried under the cost model; and
iv. the revaluation surplus, indicating the change for the period and any restrictions onthe
distribution of the balance to shareholders.

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 Example 10: INDIGO LIMITED
Question: Indigo Limited (IL) purchased a building on 1 April 2015 for Rs.10 million at which point it was considered to have a useful
life of 40 years. At the year ended 31 March 2020, IL decided torevalue the building to its market value of Rs.9.8 million.
Required:
How the above building shall be accounted for in the books(means extracts of financial statements) of IL for the year ended 31 March
2020?
Answer:
Statement of comprehensive income extract for the year ended 31 March 2020

Profit or loss account:

Depreciation charge = Rs.0.25 million (W1)Other comprehensive income:

Revaluation surplus = Rs.1.05 million (W2)

Statement of financial position extract as at 31 March 2020

Building at valuation = Rs.9.8 million

Statement of changes in equity extract for the year ended 31 March 2020

Revaluation reserve
Revaluation surplus = Rs.1.05 million (W2)

Workings:
Revaluation takes place at year end, therefore a full year of depreciation must first be charged.

(W1) Depreciation for the year ended 31 March 2020

Rs.10 million / 40 years = Rs.0.25 million
(W2) Revaluation
Carrying value of building at revaluation date (10 m – (10 m/40 years x 5 years)) = Rs.8.75 m
Revaluation of building = Rs.9.8 m

Gain on revaluation = Rs.1.05 m

Example 11:
Question: At 1 April 2019, Glacier Limited (GL) carried its office at its original cost of Rs.20 million and depreciation of Rs.4
million (based on straight line method to its original life of 50 years). GL decided to revalue the office on 1 October 2019 to its
current value of Rs.22 million. The useful life remaining was reassessed at the time of valuation and is considered to be 40 years
at this date. It is the company’s policy to charge depreciation proportionally.
Required:
How the office will be accounted for in the financial statements of GL for the year ended 31 March2020?
Answer:
Statement of comprehensive income extract for the year ended 31 March 2020 Depreciation charge
(200,000 (W1) + 275,000 (W3) = Rs. 475,000
Other comprehensive income:
Revaluation gain (W2) = Rs.6.2 million
Statement of financial position extract as at 31 March 2020

Revaluation (office) = Rs. 22 million

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Subsequent depreciation (W3) = (Rs. 275,000)
Carrying value = Rs. 21,725,000
Statement of changes in equity extract for the year 31 March 2020
Revaluation reserve (gain) = 6,122,500 [Rs. 6,200,000 (W2)-(6,200,000/40 x 6/12)]
Workings:
Revaluation takes place part way through the year and therefore depreciation must first be chargedfor the period 1 April 2019 –
30 September 2019, then the revaluation occurs so the depreciation needs to be charged for the period 1 October 2019 – 31
March 2020 on current market value.
(W1) Depreciation
1 April – 30 September 2019 = Rs.20 million / 50 years x 6/12 = Rs. 200,000

(W2) Revaluation

The carrying value of the asset at 1 October 2019 can now be found and revalued.
Carrying value of office at revaluation date (20,000,000 – (4,000,000 + 200,000)) = Rs. 15,800,000Revaluation of office = Rs.22 million
Gain on revaluation = Rs. 6,200,000

(W3) Depreciation
1 October 2019 – 31 March 2020 => Rs. 22,000,000 / 40 years x 6/12 = Rs. 275,000

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