Measurement of PPE after initial recognition

An entity may choose either cost model or revaluation model and applies the model to entire class of PPE. [IAS 16.29]

When an asset is revaluated, the entire class of the PPE to which the asset belongs shall be revaluated. It is to prevent selective revaluation which might mislead FSs.

1. Cost model

After initial recognition, an item of PPE shall be carried at its costs less any accumulated depreciation and any accumulated impairment losses.

2. Revaluation model

After initial recognition, an item of PPE whose fair value can be reliably measured shall be carried at revalued amount, being its fair value at the date of revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluation shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from the amount which would be determined using fair value at the end of reporting period. [IAS 16.31]

It means revaluation model can be applied only when fair value of the asset can be reliably measured which is often unavailable in Vietnam currently. Therefore in Vietnam, VAS 03 (2002) only allows cost of model for PPE recognition.

Fair value of an asset is usually market value determined by appraisal. If there is no market value due to specialized nature of the asset, an entity may estimate fair value using an income or depreciated replacement cost approach.

Frequency of revaluation

When fair value of the asset changes frequently and materially, annual revaluation is necessary. While for less changed asset, revaluation every three or five years would be relevant.

Accounting for revalued amount

Accounting for accumulated depreciation at the date of revaluation is treated in either of following ways: [IAS 16.35]

(i) Restated proportionately with the change in gross amount of the PPE so that the carrying amount of the PPE after revaluation equal to revalued amount. This method is often used when an asset is revalued by means of applying an index to determine its depreciated replacement costs.

(ii) Eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount. This method often applied for building.

Accounting for increase/decrease in revalued amount of PPE:

Above treatments are based on principle that losses should be immediately recognized in PL while increase in value of asset is accounted as other comprehensive income and to be transferred directly to retained earnings (not through PL) when it is subsequently used/sold. However, before recognizing in PL or surplus balance, any increase or decrease must be firstly used to revert the previously recognized decrease/increase of the same asset.

Reference

IAS 16 – Property Plant and Equipment