company accounting in australia 5 th edition ken leo john hoggett l.
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COMPANY ACCOUNTING IN AUSTRALIA – 5 th edition Ken Leo & John Hoggett. CHAPTER 12 REVALUATION AND IMPAIRMENT OF NON-CURRENT ASSETS. Learning objectives. To understand principles of AASB 1041 To prepare journal entries – revaluation increments & decrements

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company accounting in australia 5 th edition ken leo john hoggett
COMPANY ACCOUNTING IN AUSTRALIA – 5th editionKen Leo & John Hoggett
  • CHAPTER 12
  • REVALUATION AND IMPAIRMENT OF NON-CURRENT ASSETS
learning objectives
Learning objectives
  • To understand principles of AASB 1041
  • To prepare journal entries – revaluation increments & decrements
  • To account for depreciation subsequent to revaluation
  • To apply the disclosure requirements:AASB 1041
  • To be able to account for the recoverable amount test
revaluation recoverable amount
Revaluation & Recoverable amount
  • AASB 1041
    • allows companies to revalue non-current assets to their fair values
  • AASB 1010
    • states that assets cannot be valued at greater than their recoverable amount
aasb 1041
AASB 1041
  • Applies to non-current assets
  • Does not include Inventories which have to be valued @ the lower of cost or market value.
aasb 1041 measurement choices
AASB 1041 – measurement choices

2 choices

cost basis

or

fair value basis

FV = current market price

by class of assets

net revaluation increment example
Net revaluation increment- example

An entity acquires land for $75 000. Asset is revalued to $100 000. Tax rate is 30%

Land Dr 25 000 Asset Reval’n Reserve Cr 25 000

Asset Reval’n Reserve Dr 7 500 Deferred Tax Liability Cr 7 500

NB for increment the ARR must be the after tax adjustment

revaluation increment depreciable assets
Revaluation Increment– depreciable assets

Entity has depreciable asset at carrying amount of $100 000 – cost $120 000, accumulated depreciation $20 000. Revalue to $110 000. Tax base is $100 000.

Accum. Depreciation 20 000

Asset 20 000

Asset 10 000

ARR 10 000

ARR 3 000

Deferrd Tax Liability 3 000

net revaluation decrement
Net revaluation decrement

Recognise as expense in P&L

Asset carried at $100 000, cost $120 000. Revalued to $90 000.

Accum. Depreciation 20 000

Asset 20 000

Expense 10 000

Asset 10 000

revaluation decrement tax effect
Revaluation decrement – tax-effect

No tax-effect entry necessary

- not adjusted via other equity account

- tax-effect worksheet will adjust for difference between tax base and carrying amount

net decrement reverses prior revaluation increment
Net decrement reverses  prior revaluation increment

Firstly adjust against existing Revaluation Reserve – consider tax-effect

Asset has carrying amount of $50, previously revalued upwards by $10, now revalued down to $35.

Asset Reval’n Reserve 7

Deferred Tax Liability 3

Asset 10

Expense 5

Asset 5

revaluation increment reverses prior decrement
Revaluation increment reverses prior decrement 

Asset carried at $100, accumulated depreciation of $20, revalued to $130. Previously revalued downwards by $10.

Accum. Depn 20

Asset 20

Asset 10

Revenue 10

Asset 20

ARR 14

Deferred Tax Liability 6

depreciation of revalued assets
Depreciation of revalued assets 

Both AASB 1041 and AASB 1021 require the calculation of depreciation as a process of allocation.

At 1/7/02, asset revalued to $100. Useful life is 5 years..

Depreciation is $20

However company will need to look at the Fair Value @ end of the year may need to revalue again.

disclosure requirements where assets at fair value
Disclosure requirements –where assets at fair value 

AASB 1041, paragraph 9:

  • Method used to determine fair values
  • Statement re independent valuation
  • If index of replacement costs used
  • Balance of revaluation reserve
disclosure requirements
Disclosure requirements 

AASB 1041, paragraph 4.1:

Whether cost or fair value is used, show for each class of assets a reconciliation of carrying amount at beginning and end of period, showing:

  • Additions
  • Disposals
  • Acquisitions via acquiring other entities
  • net revaluation increment
  • recoverable amount write-downs
  • reversals of recoverable amount write-downs
  • depreciation expense
  • other movements
  • -
disclosure requirements15
Disclosure requirements 

AASB 1018

Net credit or debit to asset revaluation reserve

Net increment/decrement for each class of non-current assets

AASB 1040

Total reserves

For each reserve:

  • description of nature and purpose
  • amount at beginning of period
  • nature and amount of each increase/decrease
  • amount as at reporting date
the cost method
The cost method 
  • Asset recorded at cost of acquisition
  • Depreciated as per AASB 1021
  • Recoverable amount test applied
aasb 1010
AASB 1010 

AASB 1010 “Recoverable Amount of Non-Current Assets”, issued 1999

Does NOT apply to:

  • assets measured at fair value or net market value
  • inventories
  • not-for-profit entities
the recoverable amount test
The recoverable amount test

Compare carrying amounts of assets with recoverable amounts

Recoverable amount is the net amount expected to be recovered through cash inflows/outflows arising from continued use and subsequent disposal

the recoverable amount test19
The recoverable amount test 

If

recoverable amount < carrying amount

- write down the asset

- recognise an expense

- write-back accumulated depreciation

the recoverable amount test20
The recoverable amount test 

An asset is carried at $12 000 - cost of $20 000 and accumulated depreciation of $8000. Recoverable amount estimated to be $10 000.

Accum. Depreciation Dr 8 000

Asset Cr 8 000

Expense Dr 2 000

Asset Cr 2 000

Depreciation now based on $10000

disclosures aasb 1010
Disclosures - AASB 1010 
  • For assets written down in the current period, for each class of assets:

- carrying amount

- amount of write-down

- assumptions made in determining recoverable amount

  • Assets measured at recoverable amount, less depreciation
  • Whether cash flows have been discounted in determining recoverable amount
impairment test
Impairment test 
  • ED 99 “Impairment of Assets”,

issued December 1999. <<Since

Withdrawn>>

  • Expect impairment standard to replace AASB 1010 Recoverable amount in the future
tutorial questions
Tutorial Questions
  • Exercise 12.1
  • Exercise 12.2
  • Exercise 12.3