Revaluation of Fixed Assets???

Hulahoop09

Anyone know how to deal with this

Sole Trader - owner wants to reduce carrying value of land by 50%
Reason given is they see the market value of land being less than original cost, however they havent considered this in prior years.

Should all FA's be revalued seeing as one is being revalued? Will valuations have to be performed each year thereafter?

How/Who should perform the revaluation of land?

ssbob

Hulahoop09 wrote: »

Anyone know how to deal with this

Sole Trader - owner wants to reduce carrying value of land by 50%
Reason given is they see the market value of land being less than original cost, however they havent considered this in prior years.

Should all FA's be revalued seeing as one is being revalued? Will valuations have to be performed each year thereafter?

How/Who should perform the revaluation of land?

For land you will need to get a valuer/auctioneer to value it. You do not need to get it valued every year. You will carry any losses through to the P&L account however I am not sure whether you can use these against your tax comp.

dbran

Hi

+1 what ssbob said.

You dont have to revalue all fixed assets but you will have to revalue all assets in that "class" of asset. So if you have other land and buildings, these must be held on an open market basis also.

Unless there is a significant dimunition, revaluations have to be every 5 years and an interim one every three years.

Dbran

Hulahoop09

Thanks for that.

On the other hand is there any reason why this should not be done ie to revalue land fa??

Market value today may be alot less than original cost, depending on when purchased. If value drops considerably should other fixed assests be revalued?? Would their value be seen as historic?? if not revalued.

Has anyone come across this scenario before? Any guidelines which should be followed.

Thanks

Hulahoop09

Thanks Dbran obviously typing at the same time

Who should arrange for the valuation with auctioneer ie owner or accountant??

hivizman

Rather than considering this as a case of revaluation, isn't it more like a case of an impairment loss? Under IAS16 Property, Plant and Equipment, para. 30, companies have the choice of whether to follow the "cost model" or the "revaluation model". Under the "cost model", after initial recognition as an asset, an item of PPE should be carried at its cost less any accumulated depreciation and any accumulated impairment loss (defined as the amount by which the carrying amount of an asset exceeds its recoverable amount - this being the higher of the asset's fair value less costs to sell and the asset's value in use). Under para. 63, determination of whether an item of PPE is impaired should follow IAS36 Impairment of Assets.

Under IAS36, para. 9, an entity should assess at the end of each reporting period whether there is any indication that an asset is impaired. The standard gives various indications of impairment, including a significant decline in an asset's market value. The implication is that all assets to which IAS36 applies should be assessed. If there is an impairment loss for any asset, then it should be recognised.

Of course, International Accounting Standards don't apply to unincorporated entities such as sole traders, but if the owner of the business is satisfied that the significant fall in value applies only to a specific asset, then treating this as an impairment of a specific asset would avoid a full revaluation of all other assets in the same asset class.

For a sole trader (not subject to accounting standards), I don't think that there is any real need to get an independent valuation, unless the financial statements are going to be used for some "external purpose" such as backing up a loan application. In such circumstances, an external valuation may be necessary to add credibility to the valuation. I don't think that tax relief would be given for an impairment loss, so I'm not sure of the motivation for the owner to want to write down the value of the land (unless the owner believes that financial statements should actually reflect the "true" economic position of the business).

TiGeR KiNgS

hivizman wrote: »

Rather than considering this as a case of revaluation, isn't it more like a case of an impairment loss? Under IAS16 Property, Plant and Equipment, para. 30, companies have the choice of whether to follow the "cost model" or the "revaluation model". Under the "cost model", after initial recognition as an asset, an item of PPE should be carried at its cost less any accumulated depreciation and any accumulated impairment loss (defined as the amount by which the carrying amount of an asset exceeds its recoverable amount - this being the higher of the asset's fair value less costs to sell and the asset's value in use). Under para. 63, determination of whether an item of PPE is impaired should follow IAS36 Impairment of Assets.

Under IAS36, para. 9, an entity should assess at the end of each reporting period whether there is any indication that an asset is impaired. The standard gives various indications of impairment, including a significant decline in an asset's market value. The implication is that all assets to which IAS36 applies should be assessed. If there is an impairment loss for any asset, then it should be recognised.

Of course, International Accounting Standards don't apply to unincorporated entities such as sole traders, but if the owner of the business is satisfied that the significant fall in value applies only to a specific asset, then treating this as an impairment of a specific asset would avoid a full revaluation of all other assets in the same asset class.

For a sole trader (not subject to accounting standards), I don't think that there is any real need to get an independent valuation, unless the financial statements are going to be used for some "external purpose" such as backing up a loan application. In such circumstances, an external valuation may be necessary to add credibility to the valuation. I don't think that tax relief would be given for an impairment loss, so I'm not sure of the motivation for the owner to want to write down the value of the land (unless the owner believes that financial statements should actually reflect the "true" economic position of the business).

Be very careful, As has been said, an impairment goes straight to the Income statement and given that it is 50% of land this could be a large figure relative to Revenue, not to mention the weakening on the balance sheet. Lenders and Creditors may worry about this.

hivizman

TiGeR KiNgS wrote: »

Be very careful, As has been said, an impairment goes straight to the Income statement and given that it is 50% of land this could be a large figure relative to Revenue, not to mention the weakening on the balance sheet. Lenders and Creditors may worry about this.

Yes, that's why I wonder what the motivation of the sole trader is to show such a big write-down and hence to weaken the balance sheet.

Whether this is treated as an impairment loss or a revaluation deficit, and on the assumption that the land is currently in the balance sheet at cost, the write-down has to be recognised in the Income Statement, under both international and national accounting standards. However, as I have already noted, these don't technically apply to unincorporated sole traders.

A deficit on the revaluation of an asset is recognised as an expense in the Income Statement, to the extent that it is not reversing a previous revaluation surplus in respect of that asset (IAS16, para. 40). If the sole trader treats the deficit as a revaluation loss, then strictly all other land (if any) should be revalued at the same time. Revaluation surpluses on some land assets will not be offsettable against revaluation deficits on other land assets.

FRS15 Tangible Fixed Assets confirms that any fall in value from depreciated historical cost to the revalued amount should be recognised in the profit and loss account (para. 69). However, there is an exception where the recoverable amount of the asset is greater than the revalued amount - in this case, the difference between these amounts would be recognised in the statement of total recognised gains and losses, not in the profit and loss account (para. 70).

The most recent version of the Financial Reporting Standard for Smaller Entities (FRSSE) notes (para. 6.45) that fixed assets should be carried at no more than the recoverable amount, and if this is less than current carrying value, then the amount of the asset should be written down to recoverable amount. Unless the write-down is reversing a previous revaluation surplus, it should be charged in the profit and loss account (para. 6.48).

Hulahoop09

Thanks guys for your assistance