REVALUATION

The revalued amount is the fair value at the date of the revaluation less any subsequent
accumulated depreciation and subsequent accumulated impairment losses.

Revaluations shall be made with sufficient regularity such that the carrying amount does not differ
materially from the fair value at the end of the reporting period.

FREQUENCY OF REVALUATION
Depends upon the changes in the fair value of property, plant and equipment being revalued.
When the fair value of a revalued asset differs materially from the carrying amount, a further
revaluation is necessary.
Some property, plant and equipment may experience significant and volatile changes in fair value
thus necessitating annual revaluation. Three to five years revaluation may be sufficient when
there is insignificant changes in fair value

Revaluation of all items in an entire class

A class of property, plant and equipment is a grouping of assets of a similar nature and in an
entity’s operations. Assets within the class are revalued simultaneously to avoid selective
revaluation.
Examples:
a. Land e. Aircraft
b. Land and buildings f. Motor vehicles
c. Machinery g. Furniture and fixtures
d. Ships h. Office equipment

However, a class of assets may be revalued on a rolling basis provided revaluation of the class
of assets is completed within a short period of time and provided the revaluations are kept up to
date.

Basis of revaluation
a. Fair value — The fair value is determined by appraisal normally undertaken by qualified
valuers
b. Depreciated replacement cost or Sound Value — Where market value is not available,
depreciated replacement cost shall be used.
Other Terms:
Illustration: The following pertain to a machinery on the date of revaluation:

Cost Replacement Cost Appreciation

Machinery 3,000,000 4,800,000 1,800,000
Accumulated depreciation 750,000 1,200,000 450,000
CA / SV / RS 2,250,000 3,600,000 1,350,000

1. Carrying amount – historical cost minus accumulate depreciation

Cost 3,000,000
Accumulated depreciation -750,000
Carrying Amount 2,250,000

2. Appreciation or revaluation increase - is the excess of the replacement cost over the
historical cost.

3. Replacement cost - is the current "purchase price” of the plant and equipment
Replacement Cost 4,800,000
Cost -3,000,000
Appreciation 1,800,000

Accumulated Depreciation, Replacement cost 1,200,000

Accumulated Depreciation, Cost -750,000
Accumulated Depreciation, Appreciation 450,000

4. Depreciated replacement cost or Sound Value - is the replacement cost of the property,
plant and equipment minus the corresponding accumulated depreciation.
Replacement Cost 4,800,000
Accumulated Depreciation, Replacement cost -1,200,000
Depreciated Replacement Cost (Sound Value) 3,600,000

5. Revalued amount - is the fair value or depreciated replacement of the item of property,
plant and equipment. Fair value is the price that would be to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date.

6. Revaluation surplus or revaluation increment/ net appreciation - is equal to the fair value
or depreciated replacement cost minus the carrying amount of the property, plant and
equipment. Computed as: Appreciation – Corresponding Accumulated Depreciation or:
Sound Value (SV) 3,600,000
Carrying Amount (CA) -2,250,000
REVALUATION SURPLUS 1,350,000
 Statement Presentation and Classification of the foregoing:

Cost Replacement Cost

Machinery 3,000,000 4,800,000
Accumulated depreciation -750,000 -1,200,000
Carrying Amount 2,250,000 3,600,000

ACCOUNTING FOR REVALUATION

Illustration 1: NO CHANGE IN USEFUL LIFE

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.

Machinery, at cost 8,000,000
Divide by: Annual depreciation
Accumulated depreciation – cost 2,000,000
Divide by: Age of machinery 5 years
Annual Depreciation 400,000
Original Useful Life 20 Years

Two approaches in recording the revaluation:

a. Proportional approach — The accumulated depreciation at the date of revaluation is
restated proportionately with the change in the gross carrying amount of the asset so that the
carrying amount of the asset after revaluation equals revalued amount. Preferred method for
preserving gross and net amounts after revaluation.

Replacement
Cost Appreciation
Cost
Machinery 8,000,000 12,000,000 4,000,000
Accumulated depreciation -2,000,000 -3,000,000 25%* -1,000,000
Carrying Amount 6,000,000 9,000,000 3,000,000
*Note that 2M / 8M = 25% therefore, the same percentage is used for replacement cost

Machinery 4,000,000
Accumulated Depreciation 1,000,000
Revaluation surplus 3,000,000
b. Elimination approach — The accumulated depreciation is eliminated against the gross
carrying amount of the asset and the net amount restated to the revalued amount of the asset.
Accumulated Depreciation 2,000,000
Machinery. 2,000,000

The machinery accounts is then adjusted to conform with the depreciation replacement cost
of P9,000,000.
Machinery 3,000,000
Revaluation surplus 3,000,000
*9,000,000 – 6,000,000

Treatment of Revaluation Surplus

• It shall be treated as a component of Other Comprehensive Income.

• The revaluation surplus may be transferred directly to Retained Earnings when the surplus
is realized.
• The whole surplus may be realized on the retirement or disposal of the asset. However, if
the revalued asset is depreciated, part of the surplus is being realized as the asset is used.
The revaluation surplus is allocated or realized over the remaining life of the asset and
reclassified through retained earnings.

Annual Depreciation Subsequent to Revaluation

Based on the preceding illustration, remaining life is 15 years. Therefore, Depreciation on cost
and appreciation are as follows:
Depreciation on cost (6,000,000 / 15) 400,000
Depreciation on appreciation (3,000,000 / 15) 200,000
Depreciation on revalued asset 600,000

Depreciation 600,000
Accumulated depreciation 600,000
Revaluation Surplus 200,000
Retained earnings 200,000
*Second entry is piecemeal realization

Illustration 2: CHANGE IN USEFUL LIFE & RESIDUAL VALUE

Cost Replacement Cost

Machinery 8,500,000 12,400,000
Residual Value 500,000 400,000
Accumulated depreciation 3,200,000
Original useful life is 10 years and revaluation show a revised life of 12 years from acquisition
date.

1st – Determine percentage of accumulated depreciation

Annual depreciation on cost (8,500,000 - 500,000 / 10 years) 800,000

Age of machinery (3,200,000 / 800,000) 4 years
Percentage of Accumulated Depreciation 40%

2nd – Prepare a table to determine the appreciation/ revaluation surplus

Replacement
Cost 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
Remaining Depreciable Amount 4,900,000 7,200,000 2,300,000
• Note that accumulated depreciation on cost is based on original residual value, as it was the estimate at the
time the machinery is subject to depreciation

ENTRIES:
Machinery 3,900,000
Accumulated depreciation 1,600,000
Revaluation Surplus 2,300,000

Depreciation 900,000
Accumulated depreciation 900,000

Revaluation surplus 287,500

Retained Earnings 287,500

Revised useful life 12

Age of machinery 4
Remaining life 8

Depreciation on cost (4,900,000/ 8) 612,500

Depreciation on appreciation (2,300,000 / 8) 287,500
Total Depreciation 900,000
Reversal of Revaluation Surplus
Shall be charged directly against any revaluation surplus to the extent that the decrease
is a reversal of a previous revaluation and the balance is charged to expense.

Illustration: On Jan. 1, 2019, the statement of financial position shows the following:
Equipment, at cost 5,000,000
Accumulated depreciation (4 years expired out of 10 years) 2,000,000

On the same date, the equipment is revalued at a depreciated replacement cost of P4,800,000.
To determine the revaluation surplus, the following is prepared:

Replacement
Cost 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

ENTRIES:

2019 2020 2021

Equipment 3,000,000
Accumulated depreciation 1,200,000
Revaluation Surplus 1,800,000

Depreciation 800,000 800,000 800,000

Accumulated depreciation 800,000 800,000 800,000
*4.8M / 6 years

Revaluation surplus 300,000 300,000 300,000

Retained Earnings 300,000 . 300,000 . 300,000
*1.8M / 6 years

On Dec. 31, 2021, the adjusted balances are as follows:

Equipment 8,000,000
Accumulated depreciation (3.2M + 2.4M) 5,600,000
Sound Value 2,400,000

Revaluation surplus (1,800,000-900,000) 900,000

Continuing the illustration, on Jan. 1, 2022, the fair value of the equipment is determined to be
P1,050,000. The following computation and entry are prepared:
 Cost Replacement Cost Decrease
Replacement cost 8,000,000 3,500,000 -4,500,000
Accumulated depreciation ( 70%) 5,600,000 2,450,000 -3,150,000
Depreciated replacement cost 2,400,000 1,050,000 -1,350,000

Accumulated depreciation 3,150,000

Revaluation surplus 900,000
Revaluation loss 450,000
Equipment 4,500,000

Sale of Revalued Asset

All accounts relating to asset sold (sale price) must be closed (carrying amount) to determine gain
or loss on sale.
Illustration: Assume the following on the revalued building

Building 50,000,000
Accumulated depreciation 30,000,000
Revaluation surplus 4,000,000
Sale price 22,000,000

Cash 22,000,000
Accumulated depreciation 30,000,000
Building 50,000,000
Gain on sale 2,000,000

Revaluation surplus 4,000,000

Retained earnings 4,000,000

DISCLOSURES

a. The effective date of revaluation.

b. Whether an independent valuer was involved,
c. Method and significant assumptions applied in estimating fair value.
d. The extent to which the fair value was determined directly by reference to observable
prices in an active market or recent market transactions on an arm's length terms or was
estimated using other valuation technique.
e. Historical cost and carrying amount of each class of revalued property, plant and
equipment.
f. Revaluation surplus, indicating the movement for the period and any restrictions on the
distribution of the balance to shareholders.
Source: Intermediate Accounting Vol. 1 by Atty. C.T. Valix