Fixed Asset Revaluation and Disposal: Accounting Procedures
- Graziano Stefanelli
- 20 hours ago
- 3 min read
1. Fixed Asset Revaluation
a) What is Revaluation?
Revaluation is the process of adjusting the carrying amount of property, plant, and equipment (PPE) to reflect fair value at the date of revaluation. This option is available under IFRS (IAS 16) but is generally not permitted under US GAAP, which uses the cost model.
b) When is Revaluation Appropriate?
Significant changes in fair value since the last measurement.
To present a more accurate financial position.
Common for land, buildings, and sometimes specialized equipment.
c) Revaluation Model (IFRS Only)
PPE is carried at revalued amount (fair value at revaluation date less subsequent depreciation and impairment).
Revaluations must be made regularly so that carrying amount does not differ materially from fair value.
All assets within a class must be revalued.
d) Accounting for Revaluation Increases and Decreases
Increase:
Recognized in other comprehensive income (OCI) and accumulated in equity under "revaluation surplus" unless it reverses a previous decrease recognized in profit or loss.
Decrease:
Recognized in profit or loss unless it reverses a previous increase in revaluation surplus.
e) Depreciation After Revaluation
Depreciation is calculated based on the new carrying amount and the asset’s remaining useful life after revaluation.
2. Disposal of Fixed Assets
a) Identifying Asset Disposal
Disposal occurs when an asset is sold, scrapped, exchanged, or otherwise removed from use. Disposal triggers derecognition of both the asset and any accumulated depreciation (and impairment losses, if any).
b) Calculating Gain or Loss on Disposal
Formula:
Gain or Loss = Sale Proceeds − Carrying Amount (Cost − Accumulated Depreciation ± Revaluation Surplus Adjustments)
c) Accounting Entries for Disposal
Remove the asset and related accumulated depreciation:
Dr. Accumulated Depreciation
Dr. Cash (if sold)
Dr./Cr. Loss or Gain on Disposal
Cr. Fixed Asset (original cost)
Adjust for revaluation surplus (if applicable):
Any remaining revaluation surplus related to the disposed asset may be transferred directly to retained earnings, not through profit or loss.
Example:
Cost: $100,000
Accumulated depreciation: $80,000
Net book value: $20,000
Sale proceeds: $25,000
Journal Entry:
Dr. Accumulated Depreciation $80,000
Dr. Cash $25,000
Cr. Fixed Asset $100,000
Cr. Gain on Disposal $5,000
d) Partial Disposal
If only a portion of an asset is disposed, allocate cost and accumulated depreciation accordingly.
3. Financial Statement Presentation
Balance Sheet: PPE is presented at carrying amount (cost or revalued amount less accumulated depreciation and impairment).
Income Statement: Gains or losses on disposal are included in profit or loss.
Other Comprehensive Income (OCI): Revaluation increases are reflected in OCI.
4. Disclosure Requirements
IFRS (IAS 16):
Date and details of revaluation, methods used, and significant assumptions.
Carrying amount if cost model had been applied.
Revaluation surplus changes and disposals.
US GAAP:
Cost and accumulated depreciation.
Details of disposals and related gains or losses.
5. Common Issues and Best Practices
Regular revaluation: Ensure revaluations are performed frequently enough for fair value accuracy.
Componentization: Large assets with parts of different useful lives may require separate revaluation and disposal tracking.
Comprehensive records: Maintain detailed fixed asset registers to support calculations.
Tax impact: Gains and losses on disposal may have tax implications.
6. Example Table: Fixed Asset Disposal Calculation
Description | Amount |
Cost | $100,000 |
Accumulated Deprec. | $80,000 |
Net Book Value | $20,000 |
Sale Proceeds | $25,000 |
Gain on Disposal | $5,000 |
7. Standards Reference
IFRS: IAS 16 “Property, Plant and Equipment”
US GAAP: ASC 360 “Property, Plant, and Equipment”
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