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6: Accounting for non-current assets PART B SINGLE COMPANY FINANCIAL ACCOUNTS1.7 Retirements and disposals
When an asset is permanently withdrawn from use, or sold or scrapped, and no future economic benefits are expected from its disposal, it should be withdrawn from the statement of financial position.
Gains or losses are the difference between the net disposal proceeds and the carrying amount of the asset. They should be recognised as income or expense in profit or loss. This applies also to revalued assets.
1.8 Derecognition
5/10, 5/11, 9/11, 3/12
An entity is required to derecognise the carrying amount of an item of property, plant or equipment that it disposes of on the date the criteria for the sale of goods in IAS 18 Revenue would be met. This also applies to parts of an asset.
An entity cannot classify as revenue a gain it realises on the disposal of an item of property, plant and equipment.
Learning outcome C2(a)
A business purchased two rivet-making machines on 1 January 20X5 at a cost of $15,000 each. Each had an estimated life of five years and a nil residual value. The straight line method of depreciation is used.
Owing to an unforeseen slump in market demand for rivets, the business decided to reduce its output of rivets, and switch to making other products instead. On 31 March 20X7, one rivet-making machine was sold (on credit) to a buyer for $8,000.
Later in the year, however, it was decided to abandon production of rivets altogether, and the second machine was sold on 1 December 20X7 for $2,500 cash.
Prepare the machinery ledger account, provision for depreciation of machinery ledger account and disposal of machinery ledger account for the accounting year to 31 December 20X7.
1.9 Revaluations
5/10, 5/11, 9/11, 3/12
The market value of land and buildings usually represents fair value, assuming existing use and line of business. Such valuations are usually carried out by professionally qualified valuers.
In the case of plant and equipment, fair value can also be taken as market value. Where a market value is not available, however, depreciated replacement cost should be used. There may be no market value where types of plant and equipment are sold only rarely or because of their specialised nature (ie they would normally only be sold as part of an ongoing business).
The frequency of valuation depends on the volatility of the fair values of individual items of property, plant and equipment. The more volatile the fair value, the more frequently revaluations should be carried out. Where the current fair value is very different from the carrying value then a revaluation should be carried out.
Most importantly, when an item of property, plant and equipment is revalued, the whole class of assets to which it belongs should be revalued. A class is a grouping of assets of a similar nature, for example, land, buildings, motor vehicles etc.
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All the items within a class should be revalued at the same time, to prevent selective revaluation of certain assets and to avoid disclosing a mixture of costs and values from different dates in the financial statements. A rolling basis of revaluation is allowed if the revaluations are kept up to date and the revaluation of the whole class is completed in a short period of time.
1.9.1 Accounting entries for a revaluation
When an asset is revalued, the double entry to account for it is:
DEBIT Property, plant and equipment (statement of financial position) CREDIT Revaluation surplus (statement of financial position)
The revaluation surplus is part of owners’ equity and so the credit to the revaluation surplus will be seen as ‘other comprehensive income’ in the statement of profit or loss and other comprehensive income. If the revaluation is reversing a previous decrease in value that was recognised as an expense, the increase in value should first be recognised as income up the value that was previously recognised as an expense, any excess is then taken to the revaluation surplus.
Binkie Co has an item of land carried in its books at $13,000. Two years ago a slump in land values led the company to reduce the carrying value from $15,000. This was taken as an expense in the statement of profit or loss. There has been a surge in land prices in the current year, however, and the land is now worth $20,000.
Required
Account for the revaluation in the current year.
The double entry is:
DEBIT Asset value (statement of financial position) $7,000
CREDIT Statement of profit or loss $2,000
Revaluation surplus $5,000
Note: the credit to the revaluation surplus will be shown under 'other comprehensive income'.
The case is similar for a decrease in value on revaluation. Any decrease should be recognised as an expense, except where it offsets a previous increase taken as a revaluation surplus in owners' equity. Any decrease greater than the previous upwards increase in value must be taken as an expense in the profit or loss.
Let us simply swap round the example given above. The original cost was $15,000, revalued upwards to $20,000 two years ago. The value has now fallen to $13,000.
Required
Account for the decrease in value.