Measurement subsequent to initial recognition

The standard offers two possible treatments here, essentially a choice between keeping an asset recorded atcostor revaluing it to fair value.

(a) Cost model. Carry the asset at its cost less accumulated depreciation and any accumulated impairment losses.

(b) Revaluation model. Carry the asset at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and any accumulated impairment losses. Revaluations should be made regularly enough so that the carrying amount approximates

to fair value at the reporting date. The revaluation model is only available if the item can be measured reliably.

6.6.1 Revaluations

Themarket 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.

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.

How should any increase in value be treated when a revaluation takes place? The debit will be the increase in value in the statement of financial position, but what about the credit? IAS 16 requires the increase to be credited to a revaluation surplus (ie part of owners' equity), unlessthe increase is

reversing a previous decrease which was recognised as an expense. To the extent that this offset is made, the increase is recognised as income; any excess is then taken to the revaluation reserve.

IAS 16 makes further statements about revaluation, but these are beyond the scope of your syllabus.

6.7 Depreciation

The standard reflects the following approach to depreciation.

x The depreciable amount of an item of property, plant and equipment should be allocated on a

systematic basis over its useful life.

x The depreciation method used should reflect the pattern in which the asset's economic benefits

are consumed by the entity.

x The depreciation charge for each period would be recognised as an expense unless it is included

in the carrying amount of another asset.

Most of the comments on depreciation in IAS 16 are dealt with in Section 1.

Land and buildings are dealt with separately even when they are acquired together because land normally has an unlimited life and is therefore not depreciated. In contrast buildings do have a limited life and must be depreciated. Any increase in the value of land on which a building is standing will have no impact on the determination of the building's useful life.

Depreciation is usually treated as an expense, but not where it is absorbed by the entity in the process of producing other assets. For example, depreciation of plant and machinery is incurred in the production of goods for sale (inventory items). In such circumstances, the depreciation is included in the cost of the new assets produced.

6.7.1 Review of useful life

A review of the useful life of property, plant and equipment should be carried out at least annuallyand the depreciation charge for the current and future periods should be adjusted if expectations have changed significantly from previous estimates.

6.7.2 Review of depreciation method

Thedepreciation method should also be reviewed periodicallyand, if there has been a significant change in the expected pattern of economic benefits from those assets, the method should be changed to suit this changed pattern. When such a change in depreciation method takes place the change should be accounted for as a change in accounting estimate and the depreciation charge for the current and future periods should be adjusted.

6.7.3 Impairment of asset values

Thecarrying amount of an item or group of identical items of property, plant and equipment should also be reviewed periodically. This is to assess whether the recoverable amount has declined below the carrying amount. When there has been such a decline, the carrying amount should be reduced to the

recoverable amount.

Recoverable amounts should be considered on an individual asset basis or for groups of identical assets.