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Accounting standards

Dhruv (Student CA-IPCC) (68 Points)

15 September 2011

What is the accounting for depreciation on such revalued assets in subsequent years? Is the whole amount expensed in profit and loss account?

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CA Sachin Rastogi (Audit/IFRS Manager) (338 Points)
Replied 15 September 2011

In case of revaluation, the depreciation is calculated on the total revalued amount over a period of balance useful lives assessed on the date of revaluation. New cost for the purpose of depreciation will be gross cost less accumulated depreciation on the date of revaluation.

Along with this, the revaluation reserve is amortised to the income statement based on the useful life of the asset to which it relates. This is done to ensure that depreciation on the revalued amounts shouldn’t inflate/ deflate the income statement.

Example: On 1 Jan 2010 the gross cost of asset if 100 and accumulated depreciation is 20. On this date the asset cost is revalued by 50 with the remaining life of the asset to be 10 years. So the relevant cost for the purpose of calculating depreciation is 130(100-20+50).

Assuming a case of straight line depreciation, the depreciation charge will be 13 (130/10). In the same manner, the current year amortisation of revaluation reserve is 5 (50/10). Thus, the net impact on income statement is only 8 (13-5).

Hope that above will help you.

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Prakash (Chartered Accountant) (560 Points)
Replied 15 September 2011

AS per AS-6 " Depreciation Accounting"

The amount of Depreciation is Calculated on Historical Cost or the other amount in place of Historical Cost like Revalued Amount

So, the depreciation should be charged on the basis of revalued amount and the same will be debited to profit and loss account

But A disclosure should be made for effect of revaluation of fixed asset on the amount of depreciation in subsequent years

CA Ravi Sisodia (CA,CS,CMA) (32226 Points)
Replied 15 September 2011

W.D.V. = Rs. 100000/- Revalued Amount = Rs. 150000/- Dep. Rate = 10% in this case total deprection is Rs. 15000/-(10% of rs.150000/- treatement of deprection - According to AS-6 rs.10000/- will be charged from P&L a/c rs.5000/- will be charged from Revaluation Reserve.

Prakash (Chartered Accountant) (560 Points)
Replied 15 September 2011

Sir

Can you please let me know, which para of AS 6 or AS 10 says above tratment

It will be helpful to me

Dhruv (Student CA-IPCC) (68 Points)
Replied 16 September 2011

thank u so much for solving the doubt....

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shakuntala chhangani (FCA Course co-ordinator WIRC coaching centre) (2525 Points)
Replied 03 November 2011

I agree with Ravi sisodia. The incremental depreciation, relatable to revalued amount, is at times debited to Revaluation Reserve. However, I would like to draw ur attention to the Guidance note of ICAI on this subject which suggests that, for reasons of prudence and s a matter of healthy practice, it would be preferable to charge depreciation on the entire revalued amount to revenue.

It means u can charge incremental dep either to P/l account or to Revaluation Reserve. The first on eis more preferable as depreciation is a period cost and should be charged to that particular period to which it relates.

Regards, CA Shakuntala Chhangani

CA Sachin Rastogi (Audit/IFRS Manager) (338 Points)
Replied 06 November 2011

Dear Shakuntala as per my understanding there is no para in AS-6 which supports the accounting treatment suggested by Ravi. In such a case i would suggest that we should opt for the accounting practice which is world wide accepted i.e International Accounting standards.

IAS-16 clearly states that depreciation is to be based on the revalued amount and a portion of revaluation reserve is debited from revaluation reserve and credited directly to retained earnings. This treatment will ensure that extra depreciation charged to P&L account is ultimately nullified in the retained earnings with the credit from revaluation reserve. However, there is a flaw here that this accounting treatment keep the free reserves at same level but it doesnt remove the volatility in income statement due to excess depreciation of the revalued portion.

By mistake in my earlier reply i hv written that portion of revaluation reserve is transferred to income statement which is not correct. It is to be transferred to retained earnings.

Hope this will clarify.

shakuntala chhangani (FCA Course co-ordinator WIRC coaching centre) (2525 Points)
Replied 09 November 2011

My dear friend, read AS 6 with Guidance note. for ur reference, i m reproducing the relevant paras of the Guidance note :

Charging of depreciation in case of revaluation of assets

28. A question may arise, as to whether the additional depreciation provision required in consequence of revaluation of fixed assets can be adjusted against “Revaluation Reserve” which is created by a company by transferring the difference between the revalued figure and the book value of the fixed assets. Depreciation is required to be provided with reference to the total value of the fixed assets as appearing in the accounts after revaluation. However, for certain statutory purposes e.g., dividends, managerial remuneration etc., only depreciation relatable to the historical cost of the fixed assets is to be provided out of the current profits of the company. In the circumstance, the additional depreciation relatable to revaluation may be adjusted against “Revaluation Reserve” by transfer to Profit and Loss Account. In other words, as per the requirements of Part II of Schedule VI to the Companies Act, the company will have to provide the depreciation on the total book value of the fixed assets (including the increased amount as a result of revaluation) in the Profit and Loss Account of the relevant period, and thereafter the company can transfer an amount equivalent to the additional depreciation from the Revaluation Reserve. Such transfer from Revaluation Reserve should be shown in the Profit and Loss Account separately and an appropriate note by way of disclosure would be desirable. Such a disclosure would appear to be in consonance with the requirement of Part I of Schedule VI to the Companies Act, prescribing disclosure of write-up in the value of fixed asset for the first five years after revaluation.

29. If a company has transferred the difference between the revalued figure and the book value of fixed assets to the “Revaluation Reserve” and has charged the additional depreciation related thereto to its Profit and Loss Account, it is possible to transfer an amount equivalent to accumulated additional depreciation from the revaluation reserve to the Profit and Loss Account or to the General Reserve provided suitable disclosure is made in the accounts as recommended in this guidance note.

30. The Revaluation Reserve is not available for payment of dividends. This view is also supported by the Companies (Declaration of Dividend out of Reserves) Rules, 1975. Similarly, accumulated losses or arrears of depredation should not be set off against Revaluation Reserve. However, the revaluation reserve can be utilised for adjustment of the additional depreciation on the increased amount due to revaluation from year to year or on the retirement of relevant fixed assets (as discussed in paragraphs 28 and 29 above respectively).

31. The revaluation of fixed assets is normally done in order to bring into books the replacement cost of such assets. This is a healthy trend as it recognises the importance of retaining sufficient funds through additional depreciation in the business for replacement of fixed assets. As such, it will be prudent not to charge the additional depreciation against revaluation reserve, though the charge of additional depreciation against revaluation reserve is not prohibited as discussed in paragraphs 28 and 29 above. The practice of not charging the additional depreciation against revaluation reserve would also give a more realistic appraisal of the company’s operations in an inflationary situation.

My dear friend, The answer given by u and Ravi, both are correct. only wording and presentation differs. when u say Rev. reserve will be amortised over income statement , it reduces. Indirectly dep. affects only revaluation reserve and not income statement as the net amount of dep. remains the same as before revaluation. when revi says that additional dep. charged to rev. reserve, ultimately it also means that rev. reserve reduces. My dear friends, the words used "may" or "possible" indicate that some other interpretation can also be made.

Please refine me further by replying.

Regards, CA Shakuntala Chhangani

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CA Sachin Rastogi (Audit/IFRS Manager) (338 Points)
Replied 09 November 2011

Dear Fellow member

Again lots of thanks for providing the extract of guidance note which deals with the treatment of depreciation on revalued asset. I agree that your reply is relevant when we look the example in context of current indian accounting standars. However, in case of converged Ind AS the reply given by me will be relevant and is also in line with the International Accounting Standards.

In nutshell, we both are correct but our answers are based on the different accounting standards.

Even then i admire your efforts in providing such a useful information for all our fraternity members.

Regards

Sachin