[hivizman]

This is an interesting discussion that may reflect the different ways in which people learn accounting. One approach is through double-entry, so every transaction and event that needs to be reflected in the financial statements is thought of in terms of debits and credits. From that perspective, HeinekenTicket's analysis is, I believe, spot-on. We debit property, plant and equipment to reflect the upward revaluation of the building and credit comprehensive income to reflect the fact this this gain is regarded as a component of "other comprehensive income". Then, we debit comprehensive income by the amount of the revaluation and credit this to a component of equity called "revaluation surplus" (see IAS 16 Property, Plant and Equipment, para. 39), just as we debit comprehensive income by the amount of profit or loss and credit this to retained earnings. Because the comprehensive income is presented in the form of a statement rather than an account, we don't show these debits as part of the statement, but the corresponding credits are included in the statement of changes in equity.

Back in the days when accountants talked of the profit and loss account and the balance sheet, the profit and loss account was a component of the double-entry system, while the balance sheet was a classified summary of the balances remaining on the accounts in the double-entry system at the end of the accounting period. In those days, the profit and loss account would be debited with appropriations such as dividends payable to owners of equity capital and (in the case of group accounts) with the share of profits attributable to minority interests. The net balance would be credited (or, in the case of a deficit, debited) to retained earnings. Items such as revaluations bypassed the profit and loss account altogether. But, with the statement of comprehensive income, all items deemed to be income and expense are reflected in the statement. If we regard the statement as really no more than a form of presentation of a "comprehensive income account", then the revaluation surplus has to be credited to that account.

A lot of people nowadays don't really learn double-entry in the more traditional way. Instead, they are taught to examine how transactions and adjustments affect assets, liabilities and owner's equity, so there is a strong focus on the statement of financial position. This is consistent with the "balance sheet" approach of conceptual frameworks - income and expenses are seen conceptually as changes in assets and liabilities that represent changes in owners' equity (other than transactions with owners, so dividends paid to owners can't be debited in the statement of comprehensive income, because they are transactions with owners). So it becomes natural to think that a revaluation of an asset is no more than an increase in the amount at which the asset is stated together with an increase of equity, accounted for under the heading of revaluation surplus.

In terms of the question presented by lauma, it's important to note that this asks "how should the revaluation be recorded in the financial statements?" rather than "what are the accounting entries for the revaluation?"

"Financial statements" are defined in para. 10 of IAS 1 Presentation of Financial Statements as the statement of financial position, the statement of comprehensive income, the statement of changes in equity, the statement of cash flows, and notes (there's also a requirement for a restated statement of financial position when there's a retrospective change of accounting policy, a retrospective restatement, or a reclassification).

So an answer to lauma's question would state that the carrying value of the asset would be increased by the revaluation surplus (this would be reflected in the note relating to property, plant and equipment in compliance with IAS 16 Property, Plant and Equipment, paras. 73(e) and 77(f)), the increase is recognised in other comprehensive income, and the increase is accumulated in equity under the heading of revaluation surplus. This would be reported within the statement of changes in equity. The one financial statement that isn't affected is the statement of cash flows.

[HeinekenTicket]

@hivizman

Your points are well made hivizman but I would disagree with the distinction you make between accounting 'back in the days' and 'nowadays'.

Originally Posted by hivizman

A lot of people nowadays don't really learn double-entry in the more traditional way. Instead, they are taught to examine how transactions and adjustments affect assets, liabilities and owner's equity, so there is a strong focus on the statement of financial position. This is consistent with the "balance sheet" approach of conceptual frameworks - income and expenses are seen conceptually as changes in assets and liabilities that represent changes in owners' equity (other than transactions with owners, so dividends paid to owners can't be debited in the statement of comprehensive income, because they are transactions with owners). So it becomes natural to think that a revaluation of an asset is no more than an increase in the amount at which the asset is stated together with an increase of equity, accounted for under the heading of revaluation surplus.

Your point about the conceptual framework focusing on the balance sheet is correct but in no way does this change the mechanics of accounting for transactions from 'back in the days'. The conceptual framework sets out definitions of assets, liabilities and equity and defines income and expenses in terms of movements in assets, liabilities and equity. This is how I illustrated accounting for both the sale of inventories and revaluation reserve, i.e. as movements in balance sheets accounts. There is nothing in the conceptual framework and nothing about a balance sheet approach that changes the mechanics of double-entry accounting and nothing will for as long as 'assets = equity + liabilities'.

As for people nowadays not really learning double-entry in the traditional way, on basic accounting courses, people can get away with rote learning and rules of thumb to pass basic exams and sometimes seem to regard knowledge of double-entry as something to be avoided. But these approaches invariably fall over at advanced levels which require sound knowledge of underlying concepts and double-entry accounting.

[hivizman]

Originally Posted by HeinekenTicket

There is nothing in the conceptual framework and nothing about a balance sheet approach that changes the mechanics of double-entry accounting and nothing will for as long as 'assets = equity + liabilities'.

I agree with this, but my impression is that recent International Financial Reporting Standards tend to be written in a way that largely avoids the use of the terms "debit" and "credit" and any reference to double-entry bookkeeping. Also, increasing numbers of businesses use accounting software that may not use the terminology of double-entry (although such systems are almost always structured on a double-entry model, this isn't always obvious at the user interface).

Originally Posted by HeinekenTicket

As for people nowadays not really learning double-entry in the traditional way, on basic accounting courses, people can get away with rote learning and rules of thumb to pass basic exams and sometimes seem to regard knowledge of double-entry as something to be avoided. But these approaches invariably fall over at advanced levels which require sound knowledge of underlying concepts and double-entry accounting.

I also agree with this - and it's frustrating, when trying to explain the accounting for quite complex transactions, to have to deal with someone who doesn't have a reasonable appreciation of double-entry and in particular of the significance of debits and credits. I do, though, think that it's a generational thing - maybe the rot set in when companies moved from the bilateral form for presenting the Profit and Loss Account and Balance Sheet to the statement form beloved of the IASB.

Sorry, beginning to sound like a Grumpy Old Man.

[HeinekenTicket]

Originally Posted by hivizman

Sorry, beginning to sound like a Grumpy Old Man.

Me too so we'll stop now!