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Gross replacement model
Transcript of Gross replacement model
Gross replacement model
IAS 16 – Property, Plant & Equipment
Revaluation value for
Refers to the replacement value of a similar new unused asset
Understanding the different replacement values and models on PPE:
Understand when and how to realise revaluation reserves
PPE can be carried using:
Purpose of revaluating PPE?
To ensure equity is not reflected too low (reducing chances of financing)
To ensure the value of the company is reflected appropriately for i.e. take overs, mergers, etc.
To ensure depreciation is reflected at the right value and therefore the actual loss in value is reflected in the year it is attributable to
REVALUATION OF PPE
Revaluation value for plant and equipment can be:
IAS 16 allows two
alternative accounting treatments
for depreciation when an asset is revalued:
Net replacement model
Gross Replacement Value
The accrued depreciation can be proportionately restated to be in line with the gross replacement value of the revaluated asset.
The revaluated amount of plant and equipment will therefore be shown at the inflated value less inflated depreciation.
Refers to the replacement value of a similar asset of the same age and/or level of use
Net Replacement Value
The accrued depreciation is therefore netted off the gross carrying amount. Depreciation is then calculated anew on the revaluated balance.
The accrued depreciation of the revalued asset is set off against the gross carrying amount.
(This is gross replacement value less accrued depreciation)
Cost of machine 1 Jan 2001 = 100 000
Useful life 5 years (20% a year)
Fair value – 1 Jan 2002 = 90 000
Revalue the asset on 1 January 2002 using the:
Dr Machine (112,500-100,000) 12,500
Cr Accrued depreciation (22,500-20,000) 2,500
Cr Revaluation surplus (OCI) (90,000-80,000) 10,000
Dr Accrued depreciation 20,000
Cr Revaluation surplus (OCI) 10,000
Dr Machine 10,000
Cr Machine 20,000
REALISING THE REVALUATION RESERVE
Fully at the sale of a revaluated asset; or
Gradually through use in line with depreciation
moves through retained earnings; or
stays in realisation reserve
The realised portion:
Realise the revaluation surplus recognised over the life of the asset
The journals at the end of the year if no further change in value occurs:
Realising the revaluation reserve at 31 December 2002 and the next 3 years thereafter:
Dr Revaluation surplus 2,500
Cr Retained earnings 2,500
( 10,000/4 = 2,500 )