Should you calculate depreciation before or after the revaluation? This depends on the date of the revaluation.
Depreciation relates to the whole year but the revaluation is at a point in time. So it depends whether this point in time is at the start or end of the year.
If the revaluation is at the start of the year, revalue and then depreciate.
If the revaluation is at the end of the year, depreciate and then revalue.
You will also need to be careful how long to depreciate the asset over. After a revaluation, the valuation figure now needs to be depreciated over the remaining useful life of the asset.
Consider the following examples to see the difference.
Example 1 – revaluation at the start of the year
A property had cost $500,000 on 1 July 2005 and is being depreciated over its useful life of 40 years. Its carrying value on 1 July 2011 is $425,000.
The property is revalued to $595,000 on 1 July 2011.
What is the revaluation gain and depreciation expense to be reported in the financial statements for the year ended 30 June 2012?
|
$ |
||
| CV at 1 July 2011 |
425,000 |
|
| Revaluation gain |
Bal fig |
170,000 |
| Valuation at 1 July 2011 |
595,000 |
|
| Depreciation for the year |
(595,000 / 34 years) |
(17,500) |
| CV at 30 June 2011 |
577,500 |
The carrying value at the start of the year is after six years of depreciation for the year ends 30 June 2006, 2007, 2008, 2009, 2010 and 2011. Annual depreciation is $500,000 divided by 40 years is $12,500 per year. $500,000 – (6 years x $12,500) = $425,000
The property is depreciated over 34 years because this is its remaining life. The original life was 40 years as at 1 July 2005. By 1 July 2011, six years have passed and so it has a remaining life of 34 years.
Example 2 – revaluation at the end of the year
A property had cost $500,000 on 1 July 2005 and is being depreciated over its useful life of 40 years. Its carrying value on 1 July 2011 is $425,000.
The property is revalued to $595,000 on 30 June 2012.
What is the revaluation gain and depreciation expense to be reported in the financial statements for the year ended 30 June 2012?
|
$ |
||
| CV at 1 July 2011 |
425,000 |
|
| Depreciation for the year |
(500,000 / 40 years) |
(12,500) |
| CV at 30 June 2012 |
412,500 |
|
| Revaluation gain |
(bal fig) |
182,500 |
| Valuation at 30 June 2012 |
595,000 |
Depreciation for the year could also have been calculated by taking the carrying value of $425,000 and dividing by the remaining life of 34 years.
Tagged: ACCA F7, CIMA F1, depreciation expense
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