ACCT90012 Chap.3 Revaluation and Impairment
Revaluation and Impairment
Keep revaluation and impairment distinct
Revaluation updates a whole class of property, plant and equipment to fair value under the selected accounting policy. Impairment prevents an individual asset or cash-generating unit from being carried above recoverable amount. Fair value and recoverable amount can interact but are not interchangeable.
An asset carried under the revaluation model can still be impaired, particularly when disposal costs or changes between revaluation dates cause carrying amount to exceed recoverable amount.
Apply revaluation to the class
After recognition, choose the cost model or revaluation model as an accounting policy for an entire class.
Revalue with sufficient regularity that carrying amount is not materially different from fair value. Account for accumulated depreciation consistently with the gross carrying amount. Selective upward revaluation of one favourable asset is not allowed.
The class rule prevents financial statements from combining stale cost amounts and current fair values opportunistically within the same category.
Route the revaluation movement
An increase is generally recognised in other comprehensive income and accumulated in revaluation surplus, except to the extent it reverses an earlier decrease for the same asset recognised in profit or loss.
A decrease is generally recognised in profit or loss, except to the extent of an existing surplus for that asset, where it is recognised in other comprehensive income. Maintain the asset-specific history.
A class-wide policy does not create one freely interchangeable surplus pool for reversing losses on unrelated assets.
Calculate recoverable amount
Recoverable amount is the higher of disposal value net of costs and value in use. Compare it with carrying amount after other required adjustments. If carrying amount exceeds recoverable amount, recognise the difference as an impairment loss.
Because the test uses the higher recovery route, selecting the lower number overstates impairment. Keep costs of disposal out of value in use and ensure value-in-use cash flows and discount rate are internally consistent about tax, inflation and risk.
Move to the cash-generating unit only when necessary
Test an individual asset when it generates cash inflows largely independent of other assets.
Otherwise identify the smallest group generating largely independent inflows. Include assets and liabilities only when they are consistent with the recoverable-amount calculation. Test goodwill at the level to which it is allocated for internal monitoring within the permitted ceiling.
Do not enlarge the unit merely to shelter a weak asset with unrelated profitable cash flows.
Allocate a CGU loss in order
Reduce goodwill allocated to the unit first, then allocate the remaining loss pro rata to other assets within scope. Do not reduce an individual asset below the highest of its disposal value net of costs when measurable, value in use when determinable, and zero.
Reallocate any amount blocked by a floor across eligible assets.
Inventories, financial assets and other items governed by separate impairment requirements are tested under their own standards before the CGU calculation.
Cap a reversal
Reverse an impairment loss when estimates used to determine recoverable amount have changed, but do not increase an asset above the carrying amount it would have had, net of depreciation or amortisation, if no impairment had been recognised.
Recompute the counterfactual carrying amount at the reversal date. Goodwill impairment is not reversed. After a reversal, revise future depreciation prospectively using the restored carrying amount and remaining useful life.
Use a three-ledger check
Maintain a carrying-amount roll-forward, a revaluation-surplus history for the individual asset and an impairment history with counterfactual ceilings.
This prevents three common errors: sending every decrease to profit or loss, confusing fair value with recoverable amount, and reversing to recoverable amount without the no-prior-impairment cap. Finish each answer with the revised carrying amount and the future depreciation base rather than stopping after the journal entry.
What this chapter covers
- 01
Apply class-wide revaluation
- 02
Route increases and decreases
- 03
Calculate recoverable amount
- 04
Allocate a CGU impairment loss
- 05
Cap an impairment reversal
Test and reverse an impairment
- 2Establish the recognition or measurement inputs.
- 2Show the calculation and journal consequence.
- 2State the boundary and final carrying or revenue amount.
Key terms
- Recoverable amount
- The higher of disposal value net of costs and value in use.
- Cash-generating unit
- The smallest identifiable asset group producing cash inflows largely independent of other assets or groups.
- Reversal ceiling
- The carrying amount that would exist, net of depreciation or amortisation, if the prior impairment had never been recognised.
Revaluation and Impairment FAQ
Why can a revalued asset still need impairment testing?
Revaluation follows fair value, while impairment compares carrying amount with the higher of value in use and disposal value net of costs. Disposal costs, timing between revaluations or a lower value-in-use outcome can leave carrying amount above recoverable amount. The revaluation model therefore does not eliminate the impairment test.
Exam move
Retrieve the five steps for Revaluation and Impairment, recompute the independent example, write the journal or presentation consequence, then change one controlling assumption and identify the first conclusion that changes.
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