ift.world-Part 4.pdf - Part 4 ift.world\/booklets\/fra-long-lived-assets-part4 R26 Long Lived Assets 4 The Revaluation Model What we have seen so far is

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Part 4 ift.world /booklets/fra-long-lived-assets-part4 R26 Long Lived Assets 4. The Revaluation Model What we have seen so far is the cost model of accounting where an asset is recorded originally at cost. This value is then depreciated every year. An alternative to cost model is the revaluation model. Under the revaluation model, assets are revalued periodically. The carrying value of an asset after revaluation becomes the fair value. The method is used when the fair value of an asset can be easily determined and is subject to judgment. IFRS permits the use of either the cost model or the revaluation model for the valuation and reporting of long-lived assets, but the revaluation model is not allowed under US GAAP. Impact of revaluation on financial statements The impact of revaluation on financial statements depends on whether the revaluation initially increased or decreased the asset class’ carrying amount. Let us consider both the cases. Downward revaluation When a revaluation initially decreases the carrying amount of an asset: The decrease is recognized as loss in the income statement. Later, if the asset’s carrying amount increases, the increase is recognized as a gain on the income statement to the extent that it reverses the revaluation decrease previously recognized for the same asset class. Any increase in excess of the reversal amount will not be recognized in the income statement, but will be recorded directly to equity as a revaluation surplus. Upward revaluation When a revaluation initially increases the carrying amount of the asset class: An increase in the carrying value of the asset class bypasses the income statement and is recorded directly under equity as a revaluation surplus. A subsequent decrease in the carrying amount first decreases the revaluation surplus and any excess beyond the reversal amount is recorded as a loss on the income statement. 1/6
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Example Upward Corp, a hypothetical manufacturing company, has elected to use the revaluation model for its machinery. Assume for simplicity that the company owns a single machine, which it purchased for $20,000 on the first day of its fiscal period, and that the measurement date occurs simultaneously with the company’s fiscal period end. 1. At the end of the first fiscal period after acquisition, assume that the fair value of the machine is determined to be $22,000. How will the company’s financial statements reflect the asset?
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  • Spring '16
  • Depreciation, Generally Accepted Accounting Principles

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