Introduction
Suppose
a new business has just started, bought a piece of land and set up an office to
start with. Question is what will be the useful life of that land? And how it
will be depreciated? What if you perceive that the Land is worth more than it
was previously? The last question pertains to the appreciation of the capital
value of the Land. How it will be treated in terms of accounting is
comprehensively explained in the International Accounting Standard and precise
answer lies in the Concept of Revaluation.
GAAP
and IFRS requires to record such assets on the cost of purchase but afterwards
on account of those asset’s augmentation in values in compatible with the
market dynamics, such assets are subsequently recognized on those appreciated
values, appreciated thresholds.
Journal Entry – Asset Purchase
Comprehensive
understanding of the accounting treatment of the Revaluation Surplus is
supported with the following illustration. Kevin and Co. purchase a building
worth CU 300,000 today. Initially these assets need to be recognized at it
outright cost of purchase that is debiting the Building Account and crediting
the corresponding Cash Account for same CU 300,000. (Alternatively Payable
Account). The recording of a certain asset (s) on the amount of outright cost
referred to as following the Cost model.
Building A/C
|
30,000
|
|
Cash or Accounts Payable A/C
|
30,000
|
Market Dynamics Suggest Appreciation
in Value
Market
dynamics suggests that there is significant appreciation in the value of the
Building which is reinforced and supported by the report of the professional
analysts. The enterprise in pursuance of
the Market dynamics decided to record the asset taking into account the extent
of capital appreciation, referred to as Revaluation Model in the IFRS.
The
monetary value of the capital appreciation is CU 30,000 as per the best
judgment exercised by the Management of the enterprise Kevin and Co. This value
will be capitalized and the journal entry for the same will be debiting the
Building Account with a corresponding credit to the Revaluation Surplus Account
and the building book value will be the accumulated figure of CU 330,000.
Building A/C
|
30,000
|
|
Revaluation Surplus A/C
|
30,000
|
Reasons
for Revaluation
It
is worth considering that the Management of any enterprise has affinity to
significantly affect the financial statements in such a way that they present
appealing numbers to the potential investors. Revaluation may prove a useful
tool in this regard for the Management to adapt the financial statements in
meeting their objectives. In order to curtail this risk, the accounting
standards require that revaluation should be performed in entirety to whole of
the class of the assets to which the asset (that is subject of Revaluation)
relates.
Nature
of Revaluation Surplus Account
It
is primarily an Equity Account. A not normal gain in its nature this is why
this sort of gain is usually integrated with the existing components of the
Equity to give rise to the aggregate figure. Asset utilization through putting
it in activity, engaging it in production leads Revaluation surplus to realize
in the form of Depreciation.
The
depreciation that is incurred on the revalued part is often referred to as the
incremental depreciation which is component of annual depreciation expense
figure for this very asset that is Building.
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