Property, plant and equipment schedules template includes a line named as “Revaluation surplus”. This is not a normal default line in the schedule and is added on rare cases only. How and why is there such a line in the schedule?
First off the line only comes up when revaluation model is used. When normally assets are carried on the balance sheet at cost less accumulated depreciation model, under the revaluation model the assets are carried at a revalued amount, being its fair value at the date of the revaluation less subsequent depreciation and impairment, provided that the fair value can be measured reliably. Don’t make a mistake here, even assets that are revalued, are also depreciated. But that’s not the point we’re trying to make here.
Revaluations, when the applicable model is applied, should be carried out regularly and for all the assets inside the same class, so that the carrying amount of an asset does not differ materially from its fair value at the balance sheet date. Mathematically the surplus comes about like this. If the carrying value is let’s say 4,000 and the fair value is estimated to be 6,000, we have a surplus, which is added to net book amount on the Property, plant and equipment schedules template. Due to double accounting this second half, the credit side of the entry is made to other comprehensive income and accumulated in equity under the name “Revaluation surplus” (note that in case of revaluation decrease reversal the surplus is recognized as income through profit or loss and not in the comprehensive income). Any decrease as a result of a revaluation is recognized as expense to the extent that it exceeds any amounts previously credited to the revaluation surplus relating to the same asset.
Now you may ask what happens with this surplus when the particular asset is disposed. Well, it’s transferred to retained earnings mostly, but may also be left under the same heading “Revaluation surplus” in equity. This transfer is made however directly to retained earnings and current year profit or loss is left untouched.
I hope that you now get the idea behind this “Revaluation surplus” disclosed in the Property, plant and equipment schedules template. It’s not a “must have” line, but may be very handy and even fair to the financial statements and to the company.
i wanted to know the entries for revaluation + if there is depreciation for the same asset
In case the asset is revalued down (i.e. it had a carrying value of 1,000 and now it’s revalued to 800), the company has made a loss from the revaluation.
The entries are as follows:
Db Impairment losses 200 (on income statement)
Cr Accumulated impairment losses 200 (on balance sheet)
In case the assets is revalued up (i.e. it had a carrying value of 800 and now it’s revalued to 1,000) the company has made a profit from the revaluation.
The entries are as follows:
Db Asset 200 (balance sheet)
Cr Revaluation Surplus 200 (income statement)
The depreciation in periods after revaluation is based on the revalued amount (whether down or up, doesnt matter). The new carrying amount is divided by the remaining useful life.
If you have any other questions, let us know 🙂
Love how you’ve written this. Great explanation!
The least that I can do! Thank you for such a brilliant explanation.
hi…, i hav a question regarding revaluation surplus , revaluation is done in 3rd year of asset and that is 800000 and the life of asset is 4 years so how r.surplus will be shown in balance sheet of the co in 3rd year ?? and in 4th year ???
It depends on the accounting framework you’re using. Generally speaking there could be a few options:
Option number 1 is that you’d keep the revaluation surplus there as it is until you dispose of the asset and then recognize the surplus in retained earnings in full (Db Revaluation Surplus and Cr Retained Earnings – both equity accounts, so movement would be within equity).
Option number 2 is to account the difference of the depreciation arising from the new revalued value compared to the original value from the surplus to the retained earnings. For an example, if the new depreciation charge would be 20,000 as compared to 18,000 which it was originally, you have difference in depreciation charges. You would still account 20,000 as an expense and to accumulated depreciation on the balance sheet, however you’d also debit the difference (2,000) to retained earnings (again using the same entry as mentioned above).
Methods 2 would reduce the revaluation surplus therefore leaving a lower buffer in the accounts in case the value of the asset falls and a potentially an impairment loss needs to be recognized. Note that both options mentioned above are also described in IAS 16.
Should you have any more questions on the surplus, just ask away.
revaluation surplus is book value of asset
how do you solve for revaluation surplus if the appraisal is made not on january 1 or december 31? let’s say, july 1. do you still have to solve for the revaluation surplus on july 1 and dec. 31 of the same year separately? how do you compute for the depreciation too?