REVALUATION
Measurement of PPE
•Initially, an item of property, plant and equipment
that qualifies for recognition shall be measured at
cost.
•After recognition, an entity shall choose either the
cost model or evaluation model as an accounting
policy and shall apply that they to an entire class of
property, plant and equipment.
Frequency of revaluation
- When the fair value of a revalued
asset differs materially from the
carrying amount, a further
revaluation is necessary. Some
property, plant and equipment
may experience significant and
volatile changes in fair value
thus necessitating annual
revaluation.
- Property, plant and equipment
with only insignificant changes
in fair value are
revalued every three to five
Revaluation of all items
in an entire class
- When property, plant and equipment are
revalued, the entire class of property,
plant and equipment should be
revalued.
- Examples of separate classes of PPEs are:
a. Land e. Aircraft
b. Land and buildings f. Motor-vehicles
c. Machinery g. Furniture and
fixtures
d. Ships h. Office
equipment
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Basis of revaluation
1. Fair value - The fair value is
determined by appraisal normally
undertaken by professional
qualified valuers
2. Depreciated replacement cost /
Sound value - Where market value
is not available, depreciated
replacement cost shall be used.
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Two approaches in recording the revaluation
1. 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 revaluation equals
the revalued amount.
2. 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
Cost Replacement
cost
Machinery 8,000,000 12,000,000
Accumulated 2,000,000
depreciation
The machinery was revalued 5 years from the date
of acquisition
The original useful life of machinery is 20 years.
The accumulated depreciation on the replacement
cost should be 25% of P12,000,000 or P12,000,000 /
20 * 5 or P3,000,000. Cost Replaceme Appreciatio
nt cost n
Machinery 8,000,00 12,000,000 4,000,000
0
Accumulated 2,000,00 3,000,000 1,000,000
depreciation 0
Proportional approach
Cost Replaceme Appreciatio
nt cost n
Machinery 8,000,00 12,000,000 4,000,000
0
Accumulated 2,000,00 3,000,000 1,000,000
depreciation 0
The
CA entry
/ SV / RS to record the revaluation
6,000,00 is:
9,000,000 3,000,000
0
Machinery 4,000,000
Accumulated depreciation
1,000,000
Revaluation surplus
3,000,000
Elimination approach
Cost Replaceme Appreciatio
nt cost n
Machinery 8,000,00 12,000,000 4,000,000
0
Accumulated 2,000,00 3,000,000 1,000,000
depreciation 0
The
CA entries
/ SV / RS relevant under elimination
6,000,00 approach:
9,000,000 3,000,000
0
Accumulated depreciation 2,000,000
Machinery 2,000,000
Machinery 3,000,000
Revaluation surplus 3,000,000
Treatment of revaluation surplus
- Revaluation surplus as a component of other
comprehensive income.
- The revaluation surplus may be transferred
directly to retained earnings when the surplus
is realized.
- Realization of Revaluation surplus
1. Disposal / Retirement - The whole surplus may
be realized on the retirement or disposal of
the asset and transferred directly to retained
earnings.
2. Continuing use - 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
Proportional approach
Cost Replaceme Appreciatio
nt cost n
Machinery 8,000,00 12,000,000 4,000,000
0
Accumulated 2,000,00 3,000,000 1,000,000
depreciation 0
The revalued amount of
CA / SV / RS
P9,000,000 shall be3,000,000
6,000,00 9,000,000
depreciated
over the remaining useful
0 life of 15 years. Thus, the
annual depreciation subsequent to the revaluation is
recorded as follows:
Depreciation (9,000,000/15) 600,000
Accumulated depreciation 600,000
The piecemeal realization of the revaluation surplus is
then recorded as follows:
Revaluation surplus (3,000,000/15) 200,000
Retained earnings 200,000
Illustration – There is change in useful life
An independent revaluation of building by a professionally qualified valuer shows the following details:
Cost Replacement
cost
Building 9,000,000 15,000,000
Accumulated 2,700,000
depreciation
Original useful life 10 years
Revised useful life 15 years
Annual depreciation P900,000
Age of building = Accumulated depreciation / Annual
depreciation
= P2,700,000 / P900,000 = 3 years
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Illustration – There is change in useful life
The proportion of the accumulated depreciation to
the original cant is 30%, meaning P2,700,000 divided
by P9,000,000, which is also the proportion of the
age of 3 years to the original useful life of 10 years.
The revaluation is analyzed as follows
Cost Replaceme Appreciatio
nt cost n
Building 9,000,00 15,000,000 6,000,000
0
Accumulated 2,700,00 4,500,000 1,800,000
depreciation 0 (15m/10*3)
CA / SV / RS 6,300,00 10,500,000 4,200,000
0
This Photo by Unknown author is licensed under CC B
Illustration – There is change in
useful life
1. To record the revaluation
Building 6,000,000
Accumulated depreciation
1,800,000
Revaluation surplus
4,200,000
2. To record subsequent annual depreciation
Depreciation 875,000
Accumulated depreciation 875,000
(P10,500,000 / 12 years remaining)
3. To record the piecemeal realization of the revaluation
surplus
Revaluation surplus (P4,000,000/12) 350,000
Retained earnings 350,000
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Illustration – With residual value
Cost Replacement
cost
Machinery 8,500,000 12,400,000
Residual value 500,000 400,000
Accumulated 3,200,000
•Original useful life
depreciation 10 years
•Revised useful life 12 years
•Annual depreciation P800,000
(8,500,000 – 500,000) / 10 years
•Age of building = Accumulated depreciation / Annual
depreciation
= P3,200,000 / P800,000 = 4 years
Illustration – With residual value
Cost Replaceme Appreciati
nt cost on
Machinery 8,500,000 12,400,000 3,900,000
Residual value 500,000 400,000 ------
Depreciable amount 8,000,000 12,000,000
Accumulated depreciation 3,200,000 4,800,000 1,600,000
(12m/10*4)
CA / SV / RS 5,300,000 7,600,000 2,300,000
(At cost – Accumulated
depreciation
Remaining useful life = Revised useful life – Age of
machinery
= 12 years – 4 years
= 8 years
The revalued amount will be depreciated over 8 years.
Illustration – With residual value
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 annual depreciation
Depreciation(7,600,000-400,000)/8 years 900,000
Accumulated depreciation 900,000
3. To record the piecemeal realization of Revaluation surplus
Revaluation surplus(2,300,000/8) 287,500
Retained earnings 287,500
Reversal of revaluation
increase
The historical cost of the land is P5,000,000 and the land
was revalued upward to P6,000,000 three years ago, as
follows:
Land 1,000,000
Revaluation surplus 1,000,000
In the current year, the fair value of the land has fallen to
P3,500,000 or a revaluation decrease of P2,500,000. The
revaluation decrease is recorded as follows:
Revaluation surplus 1,000,000
Revaluation loss or impairment loss 1,500,000
Land 2,500,000
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Reversal of revaluation
decrease
A land with cost of P5,000,000 was revalued
downward to conform with the fair value of
P4,000,000 by reason of slump in land value.
Revaluation loss 1,000,000
Land 1,000,000
However, in the current year, there has been a surge
in land prices and the land has now a fair value of
P5,500,000
Land (5,500,000-4,000,000) 1,500,000
Revaluation gain 1,000,000
Revaluation surplus 500,000
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Illustration - Reversal of revaluation
increase
On January 1, 2024, the statement of financial position shows
the following data concerning an equipment
Equipment, at cost
P5,000,000
Accumulated depreciation (10-year life, 4 years expired)
2,000,000
On the same date, the equipment is revalued at a depreciated
replacement cost or sound value of P4,800,000.
Proportion of accumulated depreciation
(P2,000,000/5,000,000) 40%
Gross replacement cost
(4,800,000/40%) P8,000,000
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Illustration - Reversal of revaluation
increase
Cost Replacement Appreciati
cost on
Equipment 5,000,0 8,000,000 3,000,000
00
Accumulated 2,000,0 3,200,000 1,200,000
Journal entries 2024 00
depreciation
Equipment
CA / SV / RS 3,000,000
3,000,00 4,800,000 1,800,000
0
Accumulated depreciation 1,200,000
Revaluation surplus 1,800,000
Depreciation(4.8M/6 years) 800,000
Accumulated depreciation 800,000
Revaluation surplus(1.8M/6 years) 300,000
Retained earnings 300,000
This Photo by Unknown author is licensed under CC B
Illustration - Reversal of revaluation
increase
Journal entries 2025
Depreciation(4.8M/6 years) 800,000
Accumulated depreciation 800,000
Revaluation surplus(1.8M/6 years) 300,000
Retained earnings 300,000
Journal entries 2026
Depreciation(4.8M/6 years) 800,000
Accumulated depreciation 800,000
Revaluation surplus(1.8M/6 years) 300,000
Retained earnings 300,00
This Photo by Unknown author is licensed under CC B
Illustration - Reversal of revaluation
increase
On December 31, 2026, the adjusted balances are:
Equipment 8,000,000
Accumulated depreciation
5,600,000
Depreciated replacement cost 2,400,000
Revaluation surplus (1,800,000-900,000)
900,000
On January 1, 2027, the fair value of the equipment is
determined to be P1,050,000.
Fair value 1/1/2027 1,050,000
Carrying amount 12/31/2026 (2,400,000)
Revaluation decrease 1,350,000
This Photo by Unknown author is licensed under CC B
Illustration - Reversal of revaluation
increase
It is necessary to "gross up the fair value of P1,050,000.
Since the useful life of the equipment is 10 years and 7
years already expired, the ratio of accumulated
depreciation is 70% and therefore the depreciated
replacement cost is 30%.
Thus, the gross replacement cost is P1,050,000 divided by
30%, or P3,500,000. Appreciatio
Cost Replacemen
t cost n
Replacement cost 8,000,0 3,500,000(SQ 4,500,000
00 )
Accumulated depreciation 5,600,0 2,450,000 3,150,000
– 70% 00
Accumulated depreciation
CA / SV / RS
3,150,000
2,400,00 1,050,000 1,350,000
Revaluation surplus 0 900,000
Revaluation Loss 450,000
Equipment 4,500,000
This Photo by Unknown author is licensed under CC B
Illustration – Sale of a revalued asset
- Realization of Revaluation surplus through disposal /
retirement
On the date of sale, the revalued building and the related
accounts have the following adjusted balances:
Building P50,000,000
Accumulated depreciation 30,000,000
Revaluation surplus 4,000,000
Sale price of building 22,000,000
This Photo by Unknown author is licensed under CC B
Illustration – Sale of a revalued asset
- Realization of Revaluation surplus through disposal /
retirement
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 through
disposal
Revaluation surplus 4,000,000
Retained earnings ,, 4,000,000
This Photo by Unknown author is licensed under CC B
1. When the revaluation model is used for reporting property,
plant and equipment, the gain should be included in
a. Retained earnings
b. Gain from revaluation in the income statement
c. A revaluation surplus as component of other comprehensive
income
d. An extraordinary gain in the income statement
1. When the revaluation model is used for reporting property,
plant and equipment, the gain should be included in
a. Retained earnings
b. Gain from revaluation in the income statement
c. A revaluation surplus as component of other comprehensive
income
d. An extraordinary gain in the income statement
2. What is the treatment of the accumulated
depreciation on the date of revaluation?
a. Restated proportionately with the change in the gross
carrying amount of the asset
b. Eliminated against the gross carrying amount of the
asset
c. Not adjusted on the date of revaluation
d. Restated proportionately with the change in the gross
carrying amount of the asset or eliminated against the
gross carrying amount of the asset
2. What is the treatment of the accumulated
depreciation on the date of revaluation?
a. Restated proportionately with the change in the gross
carrying amount of the asset
b. Eliminated against the gross carrying amount of the
asset
c. Not adjusted on the date of revaluation
d. Restated proportionately with the change in the gross
carrying amount of the asset or eliminated against the
gross carrying amount of the asset
3. If an entity has a calendar year-end and a depreciable
property is revalued at the middle of the current year,
how is the depreciation expense for the year
determined?
a. Depreciation for the year is based on the average of
the depreciation based on cost and on revalued
amount of the property.
b. Depreciation for the first half of the year is based on
cost and for the second half on revalued amount.
c. Depreciation for the entire year is based on revalued
amount.
d. Depreciation for the entire year is based on cost.
3. If an entity has a calendar year-end and a depreciable
property is revalued at the middle of the current year,
how is the depreciation expense for the year
determined?
a. Depreciation for the year is based on the average of
the depreciation based on cost and on revalued
amount of the property.
b. Depreciation for the first half of the year is based on
cost and for the second half on revalued amount.
c. Depreciation for the entire year is based on revalued
amount.
d. Depreciation for the entire year is based on cost.
4. When an asset's carrying amount is decreased as a
result of a revaluation, the decrease is
a. Recognized in profit or loss
b. Charged to retained earnings
c. Charged to revaluation surplus
d. Debited to equity
4. When an asset's carrying amount is decreased as a
result of a revaluation, the decrease is
a. Recognized in profit or loss
b. Charged to retained earnings
c. Charged to revaluation surplus
d. Debited to equity
5. The revaluation surplus that is realized because of the
use of the asset or disposal of the asset may be
transferred directly to
a. Retained earnings
b. Income
c. Share capital
d. Share premium
5. The revaluation surplus that is realized because of the
use of the asset or disposal of the asset may be
transferred directly to
a. Retained earnings
b. Income
c. Share capital
d. Share premium
10. Cool Pals Company owned an equipment costing P5,200,000
with original residual value of P400,000. The life of the asset is
10 years and was depreciated using the straight line method.
The equipment has a replacement cost of P8,000,000 with
residual value of P200,000. The age of the asset is 4 years. The
appraisal of the equipment showed a total revised useful life of
12 years and the entity decided to carry the equipment at
revalued amount.
Before income tax, what amount should be initially reported as
revaluation surplus?
a. 1,600,000 b. 2,600,000 c. 1,680,000 d. 6,680,000
10.
a. 2,600,000 b. 1,600,000 c. 1,680,000 d. 6,680,000
Cost Replacement Appreciatio
cost n
Equipment 5,200,000 8,000,000 2,800,000
Residual value 400,000 200,000 ------
Depreciable amount 4,800,000 7,800,000
Accumulated depreciation 1,920,000 3,120,000 1,200,000
(4.8M/ (7.8M/10*4)
10*4)
CA / SV / RS 3,280,000 4,880,000 1,600,000
(At cost – Accumulated
depreciation
Equipment 2,800,000
Accumulated depreciation 1,200,000
Revaluation surplus 1,800,000
