Prepared by

Coby Harmon
University of California, Santa Barbara
Westmont College
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 LEARNING OBJECTIVE 5
Revaluations Apply the accounting for
revaluations.

Recognizing Revaluations
Companies may value long-lived tangible asset subsequent
to acquisition at cost or fair value.
Network Rail (GBR) elected to use fair values to account for its
railroad network.
► Increased long-lived tangible assets by £4,289 million.
► Change in the fair value accounted for by adjusting the asset
account and establishing an unrealized gain.
► Unrealized gain is often referred to as revaluation surplus.

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 Recognizing Revaluation

Revaluation—Land
Illustration: Siemens Group (DEU) purchased land for
€1,000,000 on January 5, 2019. The company elects to use
revaluation accounting for the land in subsequent periods. At
December 31, 2019, the land’s fair value is €1,200,000. The entry
to record the land at fair value is as follows.

Land 200,000
Unrealized Gain on Revaluation - Land 200,000

Unrealized Gain on Revaluation—Land increases other comprehensive

income in the statement of comprehensive income.

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 Recognizing Revaluation

Revaluation—Depreciable Assets
Illustration: Lenovo Group (CHN) purchases equipment for
¥500,000 on January 2, 2019. The equipment has a useful life of
five years, is depreciated using the straight-line method of
depreciation, and its residual value is zero. Lenovo chooses to
revalue its equipment to fair value over the life of the equipment.
Lenovo records depreciation expense of ¥100,000 (¥500,000 ÷ 5)
at December 31, 2019, as follows.

Depreciation Expense 100,000

Accumulated Depreciation—Equipment 100,000

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 Recognizing Revaluation

Revaluation—Depreciable Assets
After this entry, Lenovo’s equipment has a carrying amount of
¥400,000 (¥500,000 - ¥100,000). Lenovo receives an independent
appraisal for the fair value of equipment at December 31, 2019,
which is ¥460,000.

Accumulated Depreciation—Equipment 100,000

Equipment 40,000
Unrealized Gain on Revaluation—Equipment 60,000

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 Recognizing Revaluation
ILLUSTRATION 11.22
Revaluation—Depreciable Assets Financial Statement
Presentation—Revaluations

Under no circumstances can the Accumulated Other Comprehensive Income

account related to revaluations have a negative balance.

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 Recognizing Revaluation

Revaluations Issues
Company can select to value only one class of assets, say
buildings, and not revalue other assets such as land or equipment.
If a company selects only buildings,
► revaluation applies to all assets in that class of assets.
► A class of assets is a grouping of items that have a similar
nature and use in a company’s operations.
► Companies must also make every effort to keep the assets’
values up to date.

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 Revaluation of Property, Plant, and
APPENDIX 11A
Equipment

LEARNING OBJECTIVE 7
Illustrate revaluation accounting procedures.

The general rules for revaluation accounting are as follows.

1. When a company revalues its long-lived tangible assets above
historical cost, it reports an unrealized gain that increases other
comprehensive income.
2. If a company experiences a loss on impairment (decrease of
value below historical cost), the loss reduces income and
retained earnings. Thus, gains on revaluation increase equity
but not net income.

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 Revaluation of Property, Plant, and
APPENDIX 11A
Equipment

3. If a revaluation increase reverses a decrease that was

previously reported as an impairment loss, a company credits
the revaluation increase to income using the account Recovery
of Impairment Loss up to the amount of the prior loss. Any
additional valuation increase above historical cost increases
other comprehensive income and is credited to Unrealized Gain
on Revaluation.
4. If a revaluation decrease reverses an increase that was
reported as an unrealized gain, a company first reduces other
comprehensive income by eliminating the unrealized gain. Any
additional valuation decrease reduces net income and is
reported as a loss on impairment.
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 Revaluation of Land

Revaluation—2019: Valuation Increase

Assume that Unilever Group (GBR and NLD) purchased land on
January 1, 2019, that cost €400,000. Unilever decides to report
the land at fair value in subsequent periods. At December 31,
2019, an appraisal of the land indicates that its fair value is
€520,000. Unilever makes the following entry to record the
increase in fair value.

Land 120,000
Unrealized Gain on Revaluation—Land 120,000 (€520,000
− €400,000)

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 Revaluation—2019: Valuation Increase
ILLUSTRATION 11A.1
Summary of Revaluation—2019

 Land is now reported at its fair value of €520,000.

 The increase in the fair value of €120,000 is reported on the
statement of comprehensive income.
 The ending balance in Unrealized Gain on Revaluation—Land
is reported as accumulated other comprehensive income in
the statement of financial position in the equity section.
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 Revaluation—2020: Decrease below
Historical Cost

What happens if the land’s fair value at December 31, 2020, is

€380,000, a decrease of €140,000 (€520,000 − €380,000)? In this
case, the land’s fair value is below its historical cost. Unilever
makes the following entry on December 31, 2020 to record the
decrease in fair value of the land.

Unrealized Gain on Revaluation—Land 120,000

Loss on Impairment 20,000
Land (€520,000 − €380,000) 140,000

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 Revaluation—2020: Decrease below Cost
ILLUSTRATION 11A.2
Summary of Revaluation—2020

 The debit to Unrealized Gain on Revaluation—Land of

€120,000 reduces other comprehensive income, which
reduces accumulated other comprehensive income.
 The debit to Loss on Impairment of €20,000 reduces net
income and retained earnings.
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 Revaluation—2021: Recovery of
Impairment Loss

At December 31, 2021, Unilever’s land value increases to

€415,000, an increase of €35,000 (€415,000 − €380,000). In this
case, the Loss on Impairment of €20,000 is reversed and the
remaining increase of €15,000 is reported in other comprehensive
income. Unilever makes the following entry to record this
transaction.

Land 35,000
Unrealized Gain on Revaluation—Land 15,000
Recovery of Impairment Loss 20,000

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 Revaluation—2021: Recovery of
Impairment Loss
ILLUSTRATION 11A.3
Summary of Revaluation—2021

On January 2, 2022, Unilever sells the land for €415,000. Unilever

makes the following entry to record this transaction.

Cash 415,000
Land 415,000

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 Revaluation—2021: Recovery of
Impairment Loss
ILLUSTRATION 11A.3
Summary of Revaluation—2021

Since the land is sold, Unilever has the option to transfer

Accumulated Other Comprehensive Income (AOCI) to Retained
Earnings.

Accumulated Other Comprehensive Income 15,000

Retained Earnings 15,000
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 Revaluation—2021: Recovery of
Impairment Loss
 The purpose of this transfer is to eliminate the unrealized
gain on the land that was sold.
 Transfers from Accumulated Other Comprehensive Income
cannot increase net income.
 Even though the land has appreciated in value by €15,000,
Unilever is not able to recognize this gain in net income over
the periods that it held the land.

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 Revaluation of Depreciable Assets

Revaluation—2019: Valuation Increase

Assume that Nokia (FIN) purchases equipment for €1,000,000 on
January 2, 2019. The equipment has a useful life of five years, is
depreciated using the straight-line method of depreciation, and its
residual value is zero. Nokia chooses to revalue its equipment to
fair value over the life of equipment. On December 31, 2019,
Nokia records depreciation expense of €200,000 (€1,000,000 ÷ 5)
as follows.

Depreciation Expense 200,000

Accumulated Depreciation—Equipment 200,000

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 Revaluation—2019: Valuation Increase

After this entry, Nokia’s equipment has a carrying amount of

€800,000 (€1,000,000 − €200,000). Nokia employs an
independent appraiser, who determines that the fair value of
equipment at December 31, 2019, is €950,000. To report the
equipment at fair value, Nokia does the following.

1. Reduces the Accumulated Depreciation—Equipment

account to zero.

2. Reduces the Equipment account by €50,000—it then is

reported at its fair value of €950,000.

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 Revaluation—2019: Valuation Increase

After this entry, Nokia’s equipment has a carrying amount of

€800,000 (€1,000,000 − €200,000). Nokia employs an
independent appraiser, who determines that the fair value of
equipment at December 31, 2019, is €950,000. To report the
equipment at fair value, Nokia does the following.

3. Records an Unrealized Gain on Revaluation—Equipment for

the difference between the fair value and carrying amount of
the equipment, or €150,000 (€950,000 − €800,000). The
entry to record this revaluation at December 31, 2019, is:

Accumulated Depreciation—Equipment 200,000

Equipment 50,000
Unrealized Gain on Revaluation—Equipment 150,000
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 Revaluation—2019: Valuation Increase
ILLUSTRATION 11A.4
Summary of Revaluation—2019

 The carrying amount of the asset is now €950,000.

 Nokia reports depreciation expense of €200,000 in the income
statement and Unrealized Gain on Revaluation—Equipment of
€150,000 in other comprehensive income.

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 Revaluation—2020: Decrease below
Historical Cost

Assuming no change in the useful life of the equipment,

depreciation expense for Nokia in 2020 is €237,500 (€950,000 ÷ 4),
and the entry to record depreciation expense on December 31,
2020 as follows.

Depreciation Expense 237,500

Accumulated Depreciation—Equipment 237,500

Under IFRS, Nokia may transfer from AOCI the difference between
depreciation based on the revalued carrying amount of the
equipment and depreciation based on the asset’s original cost to
retained earnings.
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 Revaluation—2020: Decrease below Cost

Depreciation based on the original cost was €200,000 (€1,000,000

÷ 5) and on fair value is €237,500, or a difference of €37,500
(€237,500 − €200,000). The entry to record this transfer at
December 31, 2020 is as follows.

Accumulated Other Comprehensive Income 37,500

Retained Earnings 37,500

Before revaluation in 2020, Nokia has the following amounts

related to its equipment.

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 Revaluation—2020: Decrease below Cost

Nokia determines through appraisal that the equipment now has a

fair value of €570,000. To report the equipment at fair value, Nokia
does the following.
1. Reduces the Accumulated Depreciation—Equipment account of
€237,500 to zero.

2. Reduces the Equipment account by €380,000 (€950,000 −

€570,000)—it then is reported at its fair value of €570,000.

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 Revaluation—2020: Decrease below Cost

3. Reduces Unrealized Gain on Revaluation—Equipment by

€112,500, to off set the balance in the unrealized gain account
(related to the revaluation in 2019).

4. Records a loss on impairment of €30,000.

Accumulated Depreciation—Equipment 237,500

Loss on Impairment 30,000
Unrealized Gain on Revaluation—Equipment 112,500
Equipment 380,000
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 ILLUSTRATION 11A.5
Summary of Revaluation—2020

 The carrying amount of the equipment is now €570,000.

 Nokia reports depreciation expense of €237,500 and an
impairment loss of €30,000 in the income statement.
 Nokia reports the reversal of the previously recorded
unrealized gain by recording the transfer to retained earnings
of €37,500 and the entry to Unrealized Gain on Revaluation—
Equipment of €112,500.
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 Revaluation—2021: Recovery of
Impairment Loss

Assuming no change in the useful life of the equipment,

depreciation expense for Nokia in 2021 is €190,000 (€570,000 ÷ 3),
and the entry to record depreciation expense on December 31,
2021 as follows.

Depreciation Expense 190,000

Accumulated Depreciation—Equipment 190,000

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 Nokia transfers the difference between depreciation based on the
revalued carrying amount of the equipment and depreciation based
on the asset’s original cost from AOCI to retained earnings.
Depreciation based on the original cost was €200,000 (€1,000,000
÷ 5) and on fair value is €190,000.

Retained Earnings 10,000

Accumulated Other Comprehensive Income 10,000

Before revaluation in 2021, Nokia has the following amounts

related to its equipment.

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 Revaluation—2021: Recovery of Loss

Nokia determines through appraisal that the equipment now has a

fair value of €450,000. To report the equipment at fair value, Nokia
does the following.

1. Reduces the Accumulated Depreciation—Equipment

account of €190,000 to zero.

2. Reduces the Equipment account by €120,000 (€570,000 −

€450,000)—it then is reported at its fair value of €450,000.

3. Records an Unrealized Gain on Revaluation—Equipment

for €40,000.

4. Records a Recovery of Loss on Impairment for €30,000.

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 Revaluation—2021: Recovery of Loss

Nokia determines through appraisal that the equipment now has a

fair value of €450,000. To report the equipment at fair value, Nokia
does the following. The entry to record this transaction is as
follows.

Accumulated Depreciation—Equipment 190,000

Unrealized Gain on Revaluation—Equipment 40,000
Equipment 120,000
Recovery of Loss on Impairment 30,000

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 ILLUSTRATION 11A.6
Summary of Revaluation—2021

On January 2, 2022, Nokia sells the equipment for €450,000. Nokia

makes the following entry to record this transaction.

Cash 450,000
Equipment 450,000

Nokia does not record a gain or loss because the carrying amount
of the equipment is the same as its fair value.

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 ILLUSTRATION 11A.6
Summary of Revaluation—2021

Nokia transfers the remaining balance in Accumulated Other

Comprehensive Income to Retained Earnings.

Accumulated Other Comprehensive Income 50,000

Retained Earnings 50,000

Even though the equipment has appreciated in value by €50,000,

the company does not recognize this gain in net income.

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 GLOBAL ACCOUNTING INSIGHTS

LEARNING OBJECTIVE 8
Compare accounting procedures for property, plant, and equipment under IFRS
and U.S. GAAP.

U.S. GAAP adheres to many of the same principles as IFRS in the accounting
for property, plant, and equipment. Major differences relate to use of
component depreciation, impairments, and revaluations.

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 GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Following are the key similarities and differences between U.S. GAAP and
IFRS related to property, plant, and equipment.
Similarities
• The definition of property, plant, and equipment is essentially the same
under U.S. GAAP and IFRS.
• Under both U.S. GAAP and IFRS, changes in depreciation method and
changes in useful life are treated in the current and future periods. Prior
periods are not affected.
• The accounting for plant asset disposals is the same under U.S. GAAP and
IFRS.

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 GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Similarities
• The accounting for the initial costs to acquire natural resources is similar
under U.S. GAAP and IFRS.
• Under both U.S. GAAP and IFRS, interest costs incurred during
construction must be capitalized. Recently, IFRS converged to U.S. GAAP.
• The accounting for exchanges of non-monetary assets is essentially the
same between U.S. GAAP and IFRS. U.S. GAAP requires that gains on
exchanges of non-monetary assets be recognized if the exchange has
commercial substance. This is the same framework used in IFRS.
• U.S. GAAP and IFRS both view depreciation as allocation of cost over an
asset’s life. U.S. GAAP and IFRS permit the same depreciation methods
(straight-line, diminishing-balance, units-of-production).
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 GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Differences
• Under U.S. GAAP, component depreciation is permitted but is rarely used.
IFRS requires component depreciation.
• U.S. GAAP does not permit revaluations of property, plant, equipment, and
mineral resources. Under IFRS, companies can use either the historical
cost model or the revaluation model.
• In testing for impairments of long-lived assets, U.S. GAAP uses a different
model than IFRS. Under U.S. GAAP, as long as future undiscounted cash
flows exceed the carrying amount of the asset, no impairment is recorded.
The IFRS impairment test is stricter. However, unlike U.S. GAAP, reversals
of impairment losses are permitted under IFRS.

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 GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Differences
• Under U.S. GAAP, all losses on non-monetary asset exchanges are
recognized immediately.

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 GLOBAL ACCOUNTING INSIGHTS

About The Numbers

As indicated, impairment testing under U.S. GAAP is a two-step process.
Illustration 11.18, in the text, summarizes impairment measurement under U.S.
GAAP. The key distinctions relative to IFRS relate to the use of a cash flow
recovery test to determine if an impairment test should be performed. Also,
U.S. GAAP does not permit reversal of impairment losses for assets held for
use.

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 GLOBAL ACCOUNTING INSIGHTS

On the Horizon
With respect to revaluations, as part of the conceptual framework project, the
Boards will examine the measurement bases used in accounting. It is too early
to say whether a converged conceptual framework will recommend fair value
measurement (and revaluation accounting) for property, plant, and equipment.
However, this is likely to be one of the more contentious issues, given the long-
standing use of historical cost as a measurement basis in U.S. GAAP.

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 Copyright

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