Accounting Textbooks Boundless Accounting Controlling and Reporting of Real Assets: Property, Plant, Equipment, and Natural Resources Impairment of Assets
Accounting Textbooks Boundless Accounting Controlling and Reporting of Real Assets: Property, Plant, Equipment, and Natural Resources
Accounting Textbooks Boundless Accounting
Accounting Textbooks
Accounting
Concept Version 6
Created by Boundless

Loss Restoration

Fixed asset values can be revised to reflect an increase or decrease in value; upward revisions can recover earlier impairment losses.

Learning Objective

  • Explain when it would be applicable to revalue an impaired asset

Key Points

    • A revaluation that increases or decreases an asset's value can be accounted for with a journal entry that will debit or credit the asset account.
    • An increase in the asset's value should not be reported on the income statement; instead an equity account is credited and called a "Revaluation Surplus".
    • The revaluation surplus account accounts for increases in asset value and it also offsets any downward revisions, such as an impairment loss, in asset value.
    • When the credit balance in the revaluation surplus account zeros out, an impairment loss is reported on the income statement.
    • Under US GAAP, once an asset is impaired, its value cannot be increased regardless of its fair market value. Once the value of an asset is decreased, it stays at that value unless its market value declines again.

Terms

  • International Financial Reporting Standards

    International Financial Reporting Standards (IFRS) are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries

  • Comprehensive Income

    The change in a company's owner's equity [net assets] due to transactions and other events and circumstances from non-owner sources. Comprehensive income is the sum of net income and other items that must bypass the income statement because they have not been realized

Full Text

Asset Revaluation and Impairment Loss

Under US GAAP, once an asset is impaired its value cannot be increased regardless of what its fair market value is; once the value of an asset is decreased, it stays at that value unless its market value declines again. US GAAP does require that a business impair its assets if its fair market value decreases.

Under International Financial Reporting Standards, once a fixed asset has been revalued its book value can be adjusted periodically to market value using the cost model or the revaluation model. The cost model records an asset at its historical cost. If an asset becomes impaired and an impairment loss results, the asset can fall under the revaluation model that allows periodic adjustments to the asset's book value. Future upward revisions to the value of the asset can recover losses from prior years under the revaluation model.

An upward revision to an asset's value can recover prior impairment losses

Only assets accounted for under the revaluation model can have their book value adjusted to market value.

Revaluation Surplus

A revaluation that increases or decreases an asset's value can be accounted for with a journal entry. The asset account is debited (increased) for the increase in value or credited (decreased) for a decrease in value. An increase in the asset's value should not be reported on the income statement; instead an equity account is credited called "Revaluation Surplus. " Revaluation surplus is reported in the other comprehensive income sub-section of the owner's equity section in the balance sheet. The revaluation surplus account accounts for increases in asset value, and it also offsets any downward revisions, such as an impairment loss, in asset value. When the credit balance in the revaluation surplus account zeros out, an impairment loss is reported on the income statement.

Revaluation and Depreciation

After an asset have been revalued, the asset's depreciation expense must change to reflect the new value. The asset's new book value can be divided by its remaining useful life to adjust the amount of depreciation expense reported on the income statement after the revaluation.

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