an asset has a cost of pound 1 000 000 a life of 10 years and a residual value of po 612398

Reversal of a downward valuation

An asset has a cost of £1,000,000, a life of 10 years and a residual value of £nil. At the end of year 3, when the asset’s NBV is £700,000, it is revalued to £350,000. This write down below cost of £350,000 is taken through profit or loss.

The entity then depreciated its asset by £50,000 per annum, so as to write off the carrying value of £350,000 over the remaining 7 years.

At the end of year 6, the asset is revalued to £500,000. The effect on the entity’s asset is as follows:

* Two years” depreciation (years 4 and 5) at £50,000 per annum.

Upon the revaluation in year 6 the total credit is £300,000. However, only £200,000 is taken through profit or loss. £100,000 represents depreciation that would otherwise have been charged to profit or loss in years 4 and 5. This will be taken directly to the revaluation surplus in OCI.

From the beginning of year 7 the asset will be written off over the remaining four years at £125,000 per annum.

In the example the amount of the revaluation that is credited to the revaluation surplus in OCI represents the difference between the net book value that would have resulted had the asset been held on a cost basis (£400,000) and the net book value on a revalued basis (£500,000).

Of course this is an extreme example. Most assets that are subject to a policy of revaluation would not show such marked changes in value and it would be expected that there would be valuation movements in the intervening years rather than dramatic losses and gains in years 3 and 6. However, we consider that in principle this is the way in which downward valuations should be effected.

There may be major practical difficulties for any entity that finds itself in the position of reversing revaluation deficits on depreciating assets, although whether in practice this eventuality often occurs is open to doubt. If there is any chance that it is likely to occur, the business would need to continue to maintain asset registers on the original, pre-write down basis.