11-23-2009, 10:47 PM
Dear
Differences of IAS-16 and section 235 have been materially decreased through amendments made in the CO84 in 2002 and 2003. There are three differences to be understood
DIFFERENCE 1
The major variance is that, section 235 does not allow treating âSurplus on Revaluationâ as part of Shareholdersâ Equity, while IAS-16 treats it as part of such Equity. Thatâ why it is presented in the balance sheet as a separate line item after Equity and before Non-Current Liabilities.
DIFFERENCEE 2
Resulting from the above difference, there arises another difference, which is a bit complex.
IAS-16
As per IAS-16 any positive increase in carrying value of assets due to revaluation will directly be credited to âSurplus on Revaluationâ and will not be taken to profit and loss account except in one case.
However, if revaluation results a reduction in carrying value of assets, the loss (negative surplus) will be first charged against any previous balance of âSurplus on Revaluationâ and the remaining amount of such revaluation loss/deficit (if any) will be charged to profit and loss account as loss/expense/deficit. Now IAS uses the name of Comprehensive Income Statement instead of Profit and loss account.
If this has happened previously and a new revaluation is again carried out at a subsequent reporting date, which results into Surplus (instead of deficit/loss), THEN to the extent of deficit/loss previously accounted for in profit and loss account, the new surplus will be credited to profit and loss account (as income). The balance amount of (remaining) surplus will be credited in Equity.
Example
Fixed assets of Rupess 100 were valued at Rs 150. Therefore there was a credit balance of Rs 50 in Revaluation Surplus account. A new valuation is done at reporting date which states that now the assets value comes to Rupees 90 only. So, the negative surplus of Rs 60 arises. (for simplicity I have ignored depreciation). IAs 16 requires that Rs 50 will be offset against Outstanding Balance of Surplus thereby decreasing it to zero (maximum adjustment). And the remaining Rs 10 will be charged to profit and loss account as loss.
Again on next yearâs valuation, assets value is reported to be Rs 120 (means positive surplus of Rs 30). I am again ignoring depreciation for simplicity. Now, Rs. 10 (previously charged to profit and loss account) will be taken to profit and loss as income to mitigate the impact of revaluation loss previously accounted for. And remaining Rs. 20 will be credited to âRevaluation Surplus accountâ.
Section 235
Section 235 does not allow above treatment. It says that the loss on one class of assets may be adjusted against the surplus of another asset but in all cases the surplus arising out of revaluation has to be credited to âSurplus on revaluation accountâ (Revaluation surplus). It states that such surplus cannot be taken to profit and loss account except when actually realized. Surplus actually realizes only when an asset is sold. For example an asset of Rs 10 was revalued at Rs 12 (accumulated depreciation at the time of sale was Rs 4) and it was sold at Rs 15. Then upon sale of asset following entry will be passed
DEBITS
Cash 15
Acc Depreciation 4
CREDITS
Asset 12
Gain on sale 3
Revaluation surplus taken to profit and loss account (realized) 2
_____________________________________________________
DIFFERENCE 3
IAS 16 requires that an amount equal to incremental depreciation will be debited to Revaluation Surplus and credit will be adjusted against Depreciation Expense to reduce the net incidence on profit and loss account.
SRO 45 issued during 2003 (amended Section 235) instructed entities to transfer an amount equal to incremental depreciation from Revaluation Surplus to âUn-appropriated Profitâ (retained earnings) through statement and changes in equity. (and not through profit and loss account).
Purpose was to keep the incidence on results (i.e. profit and loss account) intact and the credit be given to reserves/equity/un-appropriated profit through Statement of Changes In Equity.
To my apprehension these three are the major differences between IAS 16 and Section 235.
Let me tell you that I avoid replying academic questions on this forum and encourage students and fellows to raise professional questions since the purpose of the forum is not to academically educate people over this forum.
Therefore, at a minimum I wish students to apply their minds, make good efforts and if the issue is not resolved then come with some concrete questions.
Believe you me this forum cannot educate unless you apply your mind, do hard work, use the study materials, argue with your teachers, raise very critical questions and then come to such forum.
I hope you will understand for future.
Regards,
KAMRAN.
Differences of IAS-16 and section 235 have been materially decreased through amendments made in the CO84 in 2002 and 2003. There are three differences to be understood
DIFFERENCE 1
The major variance is that, section 235 does not allow treating âSurplus on Revaluationâ as part of Shareholdersâ Equity, while IAS-16 treats it as part of such Equity. Thatâ why it is presented in the balance sheet as a separate line item after Equity and before Non-Current Liabilities.
DIFFERENCEE 2
Resulting from the above difference, there arises another difference, which is a bit complex.
IAS-16
As per IAS-16 any positive increase in carrying value of assets due to revaluation will directly be credited to âSurplus on Revaluationâ and will not be taken to profit and loss account except in one case.
However, if revaluation results a reduction in carrying value of assets, the loss (negative surplus) will be first charged against any previous balance of âSurplus on Revaluationâ and the remaining amount of such revaluation loss/deficit (if any) will be charged to profit and loss account as loss/expense/deficit. Now IAS uses the name of Comprehensive Income Statement instead of Profit and loss account.
If this has happened previously and a new revaluation is again carried out at a subsequent reporting date, which results into Surplus (instead of deficit/loss), THEN to the extent of deficit/loss previously accounted for in profit and loss account, the new surplus will be credited to profit and loss account (as income). The balance amount of (remaining) surplus will be credited in Equity.
Example
Fixed assets of Rupess 100 were valued at Rs 150. Therefore there was a credit balance of Rs 50 in Revaluation Surplus account. A new valuation is done at reporting date which states that now the assets value comes to Rupees 90 only. So, the negative surplus of Rs 60 arises. (for simplicity I have ignored depreciation). IAs 16 requires that Rs 50 will be offset against Outstanding Balance of Surplus thereby decreasing it to zero (maximum adjustment). And the remaining Rs 10 will be charged to profit and loss account as loss.
Again on next yearâs valuation, assets value is reported to be Rs 120 (means positive surplus of Rs 30). I am again ignoring depreciation for simplicity. Now, Rs. 10 (previously charged to profit and loss account) will be taken to profit and loss as income to mitigate the impact of revaluation loss previously accounted for. And remaining Rs. 20 will be credited to âRevaluation Surplus accountâ.
Section 235
Section 235 does not allow above treatment. It says that the loss on one class of assets may be adjusted against the surplus of another asset but in all cases the surplus arising out of revaluation has to be credited to âSurplus on revaluation accountâ (Revaluation surplus). It states that such surplus cannot be taken to profit and loss account except when actually realized. Surplus actually realizes only when an asset is sold. For example an asset of Rs 10 was revalued at Rs 12 (accumulated depreciation at the time of sale was Rs 4) and it was sold at Rs 15. Then upon sale of asset following entry will be passed
DEBITS
Cash 15
Acc Depreciation 4
CREDITS
Asset 12
Gain on sale 3
Revaluation surplus taken to profit and loss account (realized) 2
_____________________________________________________
DIFFERENCE 3
IAS 16 requires that an amount equal to incremental depreciation will be debited to Revaluation Surplus and credit will be adjusted against Depreciation Expense to reduce the net incidence on profit and loss account.
SRO 45 issued during 2003 (amended Section 235) instructed entities to transfer an amount equal to incremental depreciation from Revaluation Surplus to âUn-appropriated Profitâ (retained earnings) through statement and changes in equity. (and not through profit and loss account).
Purpose was to keep the incidence on results (i.e. profit and loss account) intact and the credit be given to reserves/equity/un-appropriated profit through Statement of Changes In Equity.
To my apprehension these three are the major differences between IAS 16 and Section 235.
Let me tell you that I avoid replying academic questions on this forum and encourage students and fellows to raise professional questions since the purpose of the forum is not to academically educate people over this forum.
Therefore, at a minimum I wish students to apply their minds, make good efforts and if the issue is not resolved then come with some concrete questions.
Believe you me this forum cannot educate unless you apply your mind, do hard work, use the study materials, argue with your teachers, raise very critical questions and then come to such forum.
I hope you will understand for future.
Regards,
KAMRAN.
