entity e acquired an intangible asset that it accounts for under the revaluation mod 612371

Accounting for upward and downward revaluations

Entity E acquired an intangible asset that it accounts for under the revaluation model. The fair value of the asset changes as follows:

The diagram below summarises this information (the impact of amortisation on the carrying amount and revaluation surplus has been ignored in this example for the sake of simplicity).

The table below shows how entity E should account for the upward and downward revaluations.

The upward revaluation at A is accounted for in other comprehensive income. The downward revaluation at B first reduces the revaluation reserve for that asset to nil and the excess of £10 is recognised as a loss in the income statement. The second downward revaluation at C is recognised as a loss in income. The upward revaluation at D first reverses the cumulative loss recognised in income and the excess is accounted for in the revaluation reserve.

In the example above the impact of amortisation on the carrying amount of the assets and the revaluation surplus was ignored for the sake of simplicity. However, the cumulative revaluation surplus included in equity may be transferred directly to retained earnings when the surplus is realised, which happens either on the retirement or disposal of the asset or as the asset is used by the entity. [IAS 38.87]. In the latter case, the amount of the surplus regarded as realised is the amount of amortisation in excess of what would have been charged based on the asset”s historical cost. [IAS 38.87]. In practice this means two things:

• an entity applying the revaluation model would need to track both the historical cost and revalued amount of an asset to determine how much of the revaluation surplus has been realised; and
• any revaluation surplus is amortised over the life of the related asset. Therefore, in the case of a significant downward revaluation there is a smaller revaluation surplus available against which the downward revaluation can be offset before recognition in the income statement.

The transfer from revaluation surplus to retained earnings is not made through profit or loss. [IAS 38.87]. Therefore this transfer is not the same as recycling a gain or loss previously recognised in other comprehensive income. Accordingly, the transfer will appear as a line item in the Statement of Changes in Equity rather than in other comprehensive income.

When an intangible asset is revalued, the standard allows an entity to account for the accumulated amortisation at the date of revaluation by either: [IAS 38.80]

(a) restating it proportionately with the change in the gross carrying amount of the asset so that the carrying amount of the asset after revaluation equals its revalued amount; or

(b) eliminating it against the gross carrying amount of the asset and the net amount restated to the revalued amount of the asset.

In practice the proportionate method in (a) is mainly used when the asset”s net carrying amount is being revalued to depreciated replacement cost using an index, which will rarely be the case for an intangible asset.