1. Revaluation Method Of Depreciation

The accounting for International Accounting Standard (IAS ®) 16, Property, Plant and Equipment is a particularly important area of the Financial Reporting syllabus. You can almost guarantee that in every exam you will be required to account for property, plant and equipment at least once.This article is designed to outline the key areas of IAS 16, Property, Plant and Equipment that you may be required to attempt in the Financial Reporting exam.

In addition to the above information Yucca Co was granted a trade discount of 10% on the initial list price of the asset and a settlement discount of 5% if payment for the machine was received within one month of purchase. Yucca Co paid for the plant on 25 March 20X0.How should the above information be accounted for in the financial statements?

(See 'Related links' for the solution to Example 1.)EXAMPLE 2Construction of Ham Co’s new store began on 1 April 20X1. The following costs were incurred on the construction. The store was completed on 1 January 20X2 and brought into use following its grand opening on the 1 April 20X2. Ham Co issued a $25m unsecured loan on 1 April 20X1 to aid construction of the new store (which meets the definition of a qualifying asset per IAS 23). The loan carried an interest rate of 8% per annum and is repayable on 1 April 20X4.RequiredCalculate the amount to be included as property, plant and equipment in respect of the new store and state what impact the above information would have on the statement of profit or loss (if any) for the year ended 31 March X2.(See 'Related links' for the solution to Example 2.)Subsequent costsOnce an item of PPE has been recognised and capitalised in the financial statements, a company may incur further costs on that asset in the future. IAS 16 requires that subsequent costs should be capitalised if:. it is probable that future economic benefits associated with the extra costs will flow to the entity.

the cost of the item can be reliably measured.All other subsequent costs should be recognised as an expense in the income statement in the period that they are incurred.EXAMPLE 3On 1 March 202 Yucca Co purchased an upgrade package from Plant Co at a cost of $18,000 for the machine it originally purchased in 20X0 (Example 1). The upgrade took a total of two days where new components were added to the machine. Yucca agreed to purchase the package as the new components would lead to a reduction in production time per unit of 15%.

This will enable Yucca to increase production without the need to purchase a new machine.Should the additional expenditure be capitalised or expensed? (See 'Related links' for the solution to Example 3.)DepreciationDepreciation is defined in IAS 16 as being the systematic allocation of the depreciable amount of an asset over its useful life. In other words, depreciation applies the accruals concept to the capitalised cost of a non-current asset and matches this cost to the period that it relates to.Depreciation methodsThere are many methods of depreciating a non-current asset with the most common being:. Straight line.% on cost, or.

Cost – residual value divided by useful life. Reducing balance.% on carrying amountEXAMPLE 4An item of plant was purchased on 1 April 20X0 for $200,000 and is being depreciated at 25% on a reducing balance basis.Prepare the extracts of the financial statements for the year ended 31 March 20X2.

(See 'Related links' for the solution to Example 4.)Useful life and residual valueIAS 16 requires that these estimates be reviewed at the end of each reporting period. If either changes significantly, the change should be accounted for over the useful life remaining.EXAMPLE 5A machine was purchased on 1 April 20X0 for $120,000. It was estimated that the asset had a residual value of $20,000 and a useful life of 10 years at this date. On 1 April 20X2 (two years later) the residual value was reassessed as being only $15,000 and the useful life remaining was considered to be only five years.How should the asset be accounted for in the years ending 31 March 20X1/20X2/20X3? (See 'Related links' for the solution to Example 5.)Component depreciationIf an asset comprises two or more major components with different useful lives, then each component should be accounted for separately for depreciation purposes and depreciated over its own useful life.EXAMPLE 6A company purchased a property with an overall cost of $100m on 1 April 20X1. The property elements are made up as follows.

Calculate the annual depreciation charge for the property for the year ended 31 March 20X2. Tip: When the disposal proceeds are greater than the carrying amount there is a profit on disposal and when the disposal proceeds are less than the carrying amount there is a loss on disposal.EXAMPLE 12An asset that originally cost $16,000 and had accumulated depreciation on it of $8,000 was disposed of during the year for $5,000 cash.How should the disposal be accounted for in the financial statements? (See 'Related links' for the solution to Example 12.)Disposal of previously revalued assetsWhen an asset is disposed of that has previously been revalued, a profit or loss on disposal is to be calculated (as above). Any remaining surplus on the revaluation reserve is now considered to be a ‘realised’ gain and therefore should be transferred to retained earnings as:.

Dr Revaluation reserve. Cr Retained earningsIn summary, it can be seen that accounting for property, plant and equipment is an important topic that features regularly in the Financial Reporting exam.

With most of what is examinable feeding though from the Financial Accounting exam, this should be a comfortable topic that you can tackle well in the exam.Bobbie-Anne Retallack is a content specialist at Kaplan Publishing.

Foreign currency revaluation for General ledger. 7 minutes to read. Contributors.In this articleThis topic provides an overview of the following for the general ledger foreign currency revaluation process - setup, running the process, calculation for the process, and how to reverse the revaluation transactions, if necessary.As part of a period-end, accounting conventions require general ledger account balances in foreign currencies to be revalued using different exchange rate types (current, historical, average, etc.). For example, one accounting convention requires assets and liabilities to be revalued at the current exchange rate, fixed assets at the historical exchange rate, and profit and loss accounts at the monthly average. The General ledger foreign currency revaluation can be used to revalue the balance sheet and profit and loss accounts.

NoteForeign currency revaluation is also available in Accounts receivable (AR) and Accounts payable (AP). If you are using those modules, the outstanding transactions should be revalued using the foreign currency revaluation in those modules. The AR and AP foreign currency revaluation will create an accounting entry in General ledger to reflect the unrealized gain or loss, ensuring that the subledgers and general ledger can be reconciled.

Because the AR and AP foreign currency revaluation create accounting entries in General ledger, the accounts receivable and accounts payable main accounts should be excluded from the General ledger foreign currency revaluation.When you run the revaluation process, the balance in each main account posted in a foreign currency will be revalued. The unrealized gain or loss transactions that are created during the revaluation process are system-generated. Two transactions might be created, one for the accounting currency and a second for the reporting currency, if relevant.

Each accounting entry will post to the unrealized gain or loss and the main account being revalued. Prepare to run foreign currency revaluationBefore you run the revaluation process, the following setup is required.On the Main account page:.If the main account should be revalued in General ledger, select Foreign currency revaluation. If the main account shouldn’t be revalued (such as for AR and AP if revalued in the subledgers), clear this option.If the main account is marked for revaluation, enter the Exchange rate type. This exchange rate type will be used for revaluing the main account.

A separate field, Financial reporting exchange rate type, is available for financial reporting. The two fields are not kept in sync, allowing for different exchange rate types to be used for revaluation and financial reporting.On the Ledger page:.Specify the Exchange rate type. If the exchange rate type is not defined on the main account, this exchange rate type will be used during foreign currency revaluation.Specify the realized gain, realized loss, unrealized gain, and unrealized loss accounts for currency revaluation. Realized gain and realized loss accounts are used when settling AR and AP transactions, and unrealized gain and unrealized loss accounts are used for revaluing open transactions and general ledger main accounts.On the Currency revaluation accounts page:.Select different currency revaluation accounts for each currency and company. If no accounts are defined, the accounts from the Ledger page are used.Process foreign currency revaluationAfter the setup is complete, use the Foreign currency revaluation page to revalue the balances of the main accounts. You can run the process in real time or schedule it to run by using a batch.The Foreign currency revaluation page will display the history of each revaluation process, including when the process was run, what criteria was defined, a link to the voucher created for the revaluation, and a record if a previous revaluation was reversed. To run the revaluation process, select the Foreign currency revaluation button.The From date and To date values define the date interval for calculating the foreign currency balance that will be revalued.

When you revalue profit and loss accounts, the sum of all transactions that occur within the date interval are revalued. When you revalue balance sheet accounts, the From date is ignored. Instead, the balance to be revalued is determined by going from the beginning of the fiscal year until the To date.The Date of rate can be used to define the date for which the exchange rate should default. For example, you can revalue the balances between the date range of January 1 to January 31, but use the exchange rate defined for February 1.Select which main accounts to revalue: All, Balance sheet, or Profit and loss. Only main accounts marked for revaluation (on the Main account page) will be revalued. If you want to further restrict the range of main accounts, use the Records to include tab to define a range of main accounts, or individual main accounts.The revaluation process can be run for one or more legal entities.

The lookup will display only the legal entities to which you have access. Select the legal entities for which you want to run the revaluation process.The revaluation can be run for one or more foreign currencies. The lookup will include all currencies that were posted within the date range relevant for the type of main account (Balance sheet or Profit and loss), for the legal entities selected to revalue. The accounting currency will be included in the list, but nothing will be revalued if the accounting currency is selected.Set Preview before posting to Yes if you would like to review the result of the General ledger revaluation. The preview in General ledger is different from the simulation in the AR and AP foreign currency revaluation. The simulation in AR and AP is a report, but general ledger has a preview which can be posted, without having to run the revaluation process again.

The results of the preview can be exported to Microsoft Excel to retain the history of how the amounts were calculated. You cannot use batch processing if you want to preview the results of the revaluation.

Revaluation Method Of Depreciation

From the preview, the user has the option to post the results of all legal entities using the Post button. If there's an issue with the results for a legal entity, the user also has the option to post a subset of the legal entities using the Select legal entities to post button.After the foreign currency revaluation process is complete, a record will be created to track the history of each run. A separate record will be created for each legal entity and posting layer. Calculate unrealized gain/lossThe unrealized gain/loss transactions are created differently between General ledger revaluation and the AR and AP revaluation process. In AR and AP, the previous revaluation is completely reversed (assuming the transaction isn’t settled yet) and a new revaluation transaction is created for the unrealized gain/loss based on the new exchange rate. This is because we revalue each individual transaction in AR and AP. In General ledger, the previous revaluation is not reversed.

Instead, a transaction is created for the delta between the balance of the main account, including any previous revaluation amounts, and the new value based on the exchange rate for the Date of Rate.Example The following balances exist for main account 110110.DateLedger accountTransaction amountAccounting amountJanuary 20110110 (Cash)500 EUR (Debit)1000 USD (Debit)The main account is revalued on January 31. The unrealized gain/loss is calculated as follows.Current balance in transaction currencyCurrent balance in accounting currencyExchange rate at revaluationNew accounting currency amountUnrealized gain/loss500 EUR1000 USD1.33 EUR (500 x 1.666667)166.67 loss (833.33 – 1000)The following accounting entry will be created.DateLedger accountDebitCreditJanuary 31110110 (Cash)166.67January 31801400 (Unrealized loss)166.67No new transactions are posted for the month of February.

The main account is revalued on February 28.Current balance in transaction currencyCurrent balance in accounting currencyExchange rate at revaluationNew accounting currency amountUnrealized gain/loss500 EUR833.33 USD (1000 - 166.67)20 USD (500 x 2.5)416.67 gain (1250 – 833.33)The following accounting entry will be created.DateLedger accountDebitCreditFebruary 28110110 (Cash)416.67February 28801600 (Unrealized gain)416.67Reverse foreign currency revaluationIf you need to reverse the revaluation transaction, select the Reverse transaction button on the Foreign currency revaluation page. A new foreign currency revaluation historical record will be created to maintain the historical audit trail of when the revaluation occurred or was reversed.You can reverse the results of the revaluation out of date order, but you may need to also reverse a more current revaluation to ensure the correct balances for each revalued main account. The reversals can occur out of date order because there is no way to control which main accounts are revalued and the frequency of when they are revalued. For example, an organization may choose to revalue their cash main accounts on a quarterly basis, but all other main accounts monthly.