Author Archives: Karl

Treating foreign currencies

In essence, a functional currency is your main currency that you use in your business or unit of a business. Normally it’s expected to be the principal currency used in the economic environment the entity operates (generates and expends cash).

Now as it happens, businesses often encounter foreign currencies in their business – either buying from foreign companies or accepting currencies from clients. No matter the case, there are general treatments required if you’ve got transactions in foreign currencies.  Continue reading →

Treating accumulated depreciation when revaluing assets

When revaluing assets, your two options for dealing with current accumulated depreciation are either to eliminate it entirely or restate it proportionately. Let me explain both options with examples detailing the steps.

Elimination

With this option the accumulated depreciation is eliminated against the gross carrying amount of the asset with the net amount restated to equal the revalued amount. To give you an example:

Before revaluation:

 
 – cost

3,000
 – accumulated depreciation

1,000
Net book amount

2,000
 

The asset is revalued to:

 

3,500
 

After revaluation:

 
 – cost

3,000
 – gain on revaluation

500 (a)
Asset at revalued amount

3,500
 

Accumulated depreciation

 

1,000
Gain on revaluation

-1,000 (b)
 

Accumulated depreciation after revaluation

 

 

0

 
The gain on revaluation is 1,500 (500 (a) + 1,000(b)) *

 

 

* Essentially if you think about it, the net book amount was 2,000 and the revalued amount 3,500. The difference between those two is 1,500 so there’s your gain again found by a shorter method.

 

Proportional restatement

Accumulated depreciation is restated proportionately with the change in the gross carrying amount of the asset such that the net book value of the asset after revaluation equals its revalued amount. As an example (base details taken from above):

After revaluation:

 
 – cost

3,000
 – gain on revaluation

2,250* (a)
 

Asset at the revalued amount:

 

5,250*
 

 
 – accumulated depreciation

1,000
 – loss (that is, additional depreciation) on revaluation

750 (b)
 

Accumulated depreciation after revaluation

 

 

1,750

 
The gain on revaluation is 1,500 (2,250 (a) – 750 (b))

 

 

* You essentially have to find indexes (cost value to the net book amount and accumulated depreciation amount to the net book amount) and multiplied by the new revalued amount (In this case it’s 3,000 / 2,000 * 3,500 = 5,250 being the new cost value and as for the gain, you take off the initial cost that was 3,000. This results in gain of 2,250).

** The same as the cost, 1,000 / 2,000 * 3,500 = 1,750.

Revaluation gains – how to treat them on your statements

Initially, when accounting for a revaluation surplus, you take it into equity. It does not affect the income statement up until to the point where the asset was valued downwards in the past in which case the reverse of this decrease is accounted on the income statement just in the amount the decrease was recognized in expenses. For an example, if the initial loss was 10,000 and our current surplus is 15,000, from this 10,000 is recognized on the income statement as gain (reversal of the expense) and the rest (5,000 in this case) is going straight to equity under the line “Revaluation surplus”.  Continue reading →

List of actions to take if you decided to use revaluation method for your PPE items

Let’s say you’ve initially measured your assets using the depreciation method. This means that the cost of the asset is subsequently expensed showing also the “drop in its value” and in essence what you’ve been doing so far is distribute the expense of the investment over the period it’s being used.  Continue reading →