REVALUATION

MODEL
 MEASUREMENT OF PROPERTY, PLANT
AND EQUIPMENT

Initially, an item of PPE that qualifies for

recognition shall be measured at cost.

After recognition, an entity shall choose

either the cost model or revaluation model as
an accounting policy and shall apply that
policy to an entire class of PPE.
Cost Model
An item of PPE shall be carried at cost less
any accumulated depreciation and any
accumulated impairment losses.

Revaluation Model
After recognition as an asset, an item of
PPE whose fair value can be measured
reliably can be carried at a revalued
amount.
 Frequency of Revaluation
It depends upon the changes in the fair value of PPE
being revalued.
When the fair value of a revalued asset differs
materially from the carrying amount, a further
revaluation is necessary.
Some PPE may experience significant and volatile
changes in fair value thus necessitating annual
revaluation.
 Revaluation of all items in an
entire class
A class of PPE is a grouping of assets of a similar
nature and use in an entity’s operations.

Examples of separate classes are:

a. Land e. Aircraft
b. Land and buildings f. Motor vehicles
c. Machinery g. Furniture and fixtures
d. Ships h. Office equipment
 Basis of Revaluation
a. Fair value
- is determined by appraisal normally
undertaken by professional qualified valuers.

b. Depreciated replacement cost

- where market value is not available,
depreciated replacement cost shall be used
Definition of terms
a. Revalued amount
- the fair value or depreciated replacement cost of the
item of PPE.
b. Fair value
- the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction
between market participants at the measurement date.
c. Depreciated replacement cost
- the replacement cost of the PPE minus the
corresponding accumulated depreciation. This amount
is actually the sound value of the asset
d. Replacement cost
- the current “purchase price” of the PPE
e. Carrying amount
- equal to historical cost minus the corresponding
accumulated depreciation
f. Revaluation surplus
- equal to the fair value or depreciated replacement cost
minus the carrying amount of the PPE. This amount is also
a known as revaluation increment.
g. Appreciation or Revaluation increase
- the excess of the revalued amount over the historical
cost
Illustration:
COST REPLACEMENT COST
Machinery 3,000,000 4,800,000
Accumulated Depreciation 750,000 1,200,000
1. Cost 3,000,000
Accumulated Depreciation 750,000
Carrying Amount 2,250,000

2. Replacement cost 4,800,000

Cost 3,000,000
Appreciation 1,800,000

2. Accum. Depreciation, Replacement cost 1,200,000

Accum. Depreciation, Cost 750,000
Accum. Depreciation, Appreciation 450,000
4. Replacement cost 4,800,000
Accumulated Depreciation 1,200,000
Depreciation replacement cost 3,600,000

5. Sound value (SV) 3,600,000

Carrying amount (CA) 2,250,000
Revaluation surplus (RS) 1,350,000
Statement presentation and classification
Machinery 4,800,000
Accumulated Depreciation (1,200,000)
3,600,000

COST REPLACEMENT COST

Machinery 3,000,000 4,800,000
Accumulated Depreciation ( 750,000) (1,200,000)
Carrying amount/ Sound value 2,250,000 3,600,000
ACCOUNTING FOR REVALUATION
Illustration 1 – No change in useful life
COST REPLACEMENT COST
Machinery 8,000,000 12,000,000
Accumulated Depreciation 2,000,000

The machinery was revalued 5 years from the date of acquisition. The
original useful life of the machinery is determined as follows:

Accumulated Depreciation - Cost 2,000,000

Divided by the age of machinery 5 years
Annual Depreciation 400,000

Machinery at cost 8,000,000

Divided by annual depreciation on cost 400,000
Original useful life 20 years
Approaches in Recording the Revaluation
a. Proportional Approach
- the accumulated depreciation at the date of
revaluation is restated proportionately with the change in
the gross carrying amount of the asset so that the
carrying amount of the asset after the revaluation equals
the revalued amount.
b. Elimination Approach
- the accumulated depreciation is eliminated against
the gross carrying amount of the asset and the net
amount restated to the revalued amount of the asset.
Proportional Approach
The age of the asset is 5 years and the original useful
life is 20 years. This means that the asset is 25%
depreciated (5/20), or

P 2,000,000
= 25%
P 8,000,000

Accordingly, the accumulated depreciation on the

replacement cost should be 25% of P12,000,000 or P
3,000,000.
 COST REPLACEMENT COST APPRECIATION
Machinery 8,000,000 12,000,000 4,000,000
Accum. Depreciation 2,000,000 3,000,000 1,000,000
CA / SV/ RS 6,000,000 9,000,000 3,000,000

Machinery 4,000,000
Accumulated Depreciation 1,000,000
Revaluation Surplus 3,000,000
Elimination Approach
The accumulated depreciation is eliminated or offset
against the gross carrying amount of the machinery.
Accumulated Depreciation 2,000,000
Machinery 2,000,000
The machinery account is then adjusted to conform with
the depreciated replacement cost or sound value of P9,000,000.
Machinery 3,000,000
Revaluation Surplus 3,000,000
Sound Value 9,000,000
Debit balance in machinery 6,000,000
Revaluation Surplus 3,000,000
Query
When an asset’s carrying amount is increased as a result of
the revaluation, the increase shall be credited to revaluation
surplus as a component of other comprehensive income.
The revaluation surplus may be transferred directly to
retained earnings when the surplus is realized.

The whole surplus may be realized on the retirement or

disposal of the asset.
However, if the revalued asset is being depreciated, part of the
surplus is being realized as the asset is used.

The revaluation surplus is allocated or realized over the

remaining useful life of the asset and reclassified through retained
earnings
 COST REPLACEMENT COST APPRECIATION
Machinery 8,000,000 12,000,000 4,000,000
Accum. Depreciation 2,000,000 3,000,000 1,000,000
CA / SV/ RS 6,000,000 9,000,000 3,000,000

The original useful life is 20 years and the remaining

useful life is 15 years.

As a matter of procedure, the carrying amount,

sound value and the net appreciation or revaluation
surplus shall be allocated over the remaining useful life of
the asset.
Annual Depreciation Subsequent to the Revaluation
Depreciation (9,000,000 / 15) 600,000
Accumulated Depreciation 600,000
Depreciation on cost (6,000,000 / 15) 400,000
Depreciation on appreciation (3,000,000 / 15) 200,000
Depreciation on revalued amount 600,000

Piecemeal Realization of the Revaluation Surplus

Revaluation Surplus 200,000
Retained Earnings 200,000
The revaluation surplus of P3,000,000 is allocated over 15
years or an annual realization through retained earnings of
P200,00
Illustration 2 – Change in life and residual value
COST REPLACEMENT COST
Machinery 8,500,000 12,400,000
Residual Value 500,000 400,000
Accumulated Depreciation 3,200,000

The original useful life is 10 years and the revaluation shows a

revised useful life of 12 years from the date of acquisition.

Accumulated Depreciation - Cost 800,000

( 8,500,000 – 500,000 / 10 years )
Age of machinery 4 years
( 3,200,000 / 800,000 )
Percentage of Accumulated Depreciation 40%
( 4 years expired / 10 years )
 COST REPLACEMENT APPRECIATION
COST
Machinery 8,500,000 12,400,000 3,900,000
Residual Value 400,000 400,000 --
Depreciable amount 8,100,000 2,000,000 3,900,000
Accum. Depreciation – 40% 3,200,000 4,800,000 1,600,000
Remaining depreciable 4,900,000 7,200,000 2,300,000

Observe that the new residual value of P400,000 is

considered in determining the remaining depreciable
amount based on cost.
However, the original residual value of P500,000 must
be considered in computing the accumulated depreciation
based on cost.
Journal Entries for the first year

1. To record the revaluation

Machinery 3,900,000
Accumulated Depreciation 1,600,000
Revaluation Surplus 2,300,000

2. To record the annual depreciation

Depreciation 900,000
Accumulated Depreciation 900,000
( 7,200,000 / 8 years remaining )
 Revised useful life 12 years
Age of machinery 4
Remaining revised useful life 8 years

Depreciation on cost (4,900,000 / 8) 612,500

Depreciation on appreciation (2,300,000 / 8) 287,500
Total depreciation 900,000

3. To record the piecemeal realization of the revaluation surplus:

Revaluation Surplus 287,500

Retained Earnings 287,500
Reversal of a Revaluation Surplus
A revaluation decrease shall be charged directly against
any revaluation surplus to the extent that the decrease is a
reversal of a previous revaluation and the balance is charged to
expense.

Illustration 1
On January 1, 2019, the statement of financial position
shows the following date concerning an equipment:

Equipment - Cost 5,000,000

Accum. Depreciation 2,000,000
(10 years life, 4 years expired)
 On the same date, the equipment is revalued at a
depreciated replacement cost or sound value of P4,800,000.

Proportion of Accumulated Depreciation 40%

( 2,000,000 / 5,000,000 )
Gross Replacement Cost 8,000,000
( 4,800,000 / 60% )
COST REPLACEMENT APPRECIATION
COST
Equipment 5,000,000 8,000,000 3,000,000
Accum. Depreciation – 40% 2,000,000 3,200,000 1,200,000
Remaining depreciable 3,000,000 4,800,000 1,800,000
Journal Entries for the next three year

2019 Machinery 3,000,000

Accumulated Depreciation 1,200,000
Revaluation Surplus 1,800,000

Depreciation 800,000
Accumulated Depreciation 800,000
(4,800,000 / 6 years remaining )

Revaluation Surplus 300,000

Retained Earnings 300,000
( 1,800,000 / 6 )
2020 Depreciation 800,000
Accumulated Depreciation 800,000

Revaluation Surplus 300,000

Retained Earnings 300,000

2021 Depreciation 800,000

Accumulated Depreciation 800,000

Revaluation Surplus 300,000

Retained Earnings 300,000
 On December 31, 2021, if the journal entries are
properly posted, the adjusted balances are:

Equipment 8,000,000
Accumulated Depreciation (3,200,000 + 2,400,000) 5,600,000
Depreciated replacement cost 2,400,000
Revaluation Surplus (3,200,000 + 2,400,000) 900,000

PER BOOK ADJUSTED DECREASE

Replacement cost 8,000,000 3,500,000 4,500,000
Accum. Depreciation – 70% 5,600,000 2,450,000 3,150,000
Depreciated replacement cost 2,400,000 1,050,000 1,350,000
 The revaluation decrease of P1,350,000 is recorded as
a charge against the revaluation surplus of P900,000 and the
remainder to revaluation loss or expense

Accumulated Depreciation 3,150,000

Revaluation Surplus 900,000
Revaluation Loss 450,000
Equipment 4,500,000

In the succeeding remaining three years, the annual

depreciation should be P350,000.

P 1,050,000
= P350,000
3 years
Sale of Revalued Asset
The difference between the sale price and the carrying
amount of the revalued asset is recognized as gain or loss on the
sale.

Illustration 1

Building 50,000,000
Accumulated Depreciation 30,000,000
Revaluation Surplus 4,000,000
Sale price of Building 22,000,000
Journal Entries

1. To record the sale

Cash 22,000,000
Accumulated Depreciation 30,000,000
Building 50,000,000
Gain on sale of building 2,000,000

2. To record the realization of revaluation surplus

Revaluation Surplus 4,000,000
Retained Earnings 4,000,000
Disclosures related to Revaluation
When PPE are measured at revalued amount, the
following shall be disclosed:

a. The effective date of revaluation.

b. Whether an independent valuer was involved.
c. Method and significant assumptions applied in estimating
fair value.
d. The extent to which the fair value was determined directly
by reference to observable process in an active market or
recent market transactions on an arm’s length terms or
was estimated using other valuation technique.
e. Historical cost and carrying amount of each class
of revalued PPE.

f. Revaluation surplus, indicating the movement for

the period and any restrictions on the distribution of
the balance to shareholders.