Accounting Standard AASB 1041 July Revaluation of Non-Current Assets

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1 Accounting Standard AASB 1041 July 2001 Revaluation of Non-Current Assets

2 Obtaining a Copy of this Accounting Standard Copies of this Standard are available for purchase from the Australian Accounting Standards Board by contacting: The Customer Service Officer Australian Accounting Standards Board Level Collins Street Melbourne Victoria 3000 AUSTRALIA Phone: (03) Fax: (03) Web site: Other enquiries: Phone: (03) Fax: (03) COPYRIGHT 2001 Australian Accounting Standards Board. The copying of this Standard is only permitted in certain circumstances. Enquiries should be directed to the Australian Accounting Standards Board. ISSN AASB

3 CONTENTS MAIN FEATURES OF THE STANDARD page 6 Section and page number 1 Application 8 2 Scope 8 Materiality 10 3 Operative Date 10 4 Purpose of Standard 10 5 Applying a Measurement Basis to a Class of Non-Current Assets 11 Cost or Fair Value Basis 11 Cost Basis 11 Fair Value Basis 12 Frequency of Revaluations 13 Local Governments and Government Departments: Pre-Transfer Carrying Amounts 14 Consolidated Financial Statements 15 Net Revaluation Increments and Decrements 16 Offsetting of Revaluation Increments and Decrements 16 Recognition of Net Revaluation Increments and Decrements 16 Treatment of Revaluations of Depreciable Assets 20 Disposal of Non-Current Assets 21 6 Changing the Measurement Basis for a Class of Non-Current Assets 22 Changing from the Cost Basis to the Fair Value Basis 22 Discontinuation of the Application of the Fair Value Basis 23 AASB CONTENTS

4 7 Disclosures 24 Non-Current Assets Measured at Fair Value 24 Local Governments and Government Departments: Pre-Transfer Carrying Amounts 25 Discontinuation of Revaluations of a Class of Non-Current Assets 26 Other Disclosures 26 8 Transitional Arrangements 27 General 27 Transition to the Fair Value Basis 28 Entities that have Already Applied AASB 1041 or AAS Reverting from a Revaluation Basis to the Cost Basis 31 Public Sector Entities: Existing Revaluation Basis 33 Public Sector Entities: Progressive Revaluations Within a Class of Property, Plant and Equipment 34 Public Sector Borrowing/Financing Entities 38 9 Definitions 38 Annual Reporting Period 46 Class of Non-Current Assets 46 Profit-Seeking Entities 46 Registered Schemes 47 Public Sector Borrowing/Financing Entities 47 APPENDIX Examples of Recognising Revaluations and their Income Tax Effects 48 CONFORMITY WITH INTERNATIONAL AND NEW ZEALAND ACCOUNTING STANDARDS 63 BACKGROUND TO REVISION 67 AASB CONTENTS

5 REGULATION IMPACT STATEMENT 71 Defined words are italicised each time they appear. The definitions are in Section 9. Standards are printed in bold type and commentary in light type. AASB CONTENTS

6 The Standard: MAIN FEATURES OF THE STANDARD requires the use of either the cost basis or the fair value basis to measure a class of non-current assets subsequent to initial recognition. Any of the following measures constitutes the use of the cost basis to measure assets within a class of non-current assets: (i) (ii) (iii) their cost of acquisition, less any accumulated depreciation and accumulated recoverable amount write-downs or impairment losses; in respect of non-monetary assets contributed to the entity, their fair value as at the date of the contribution, less any subsequent accumulated depreciation and subsequent accumulated recoverable amount write-downs or impairment losses; and their carrying amounts as at the time that revaluation of that class was discontinued, less any subsequent accumulated depreciation and subsequent accumulated recoverable amount write-downs or impairment losses; (c) (d) requires that, where the fair value basis is applied, revaluations be kept up to date; specifies that a revaluation of non-current assets to fair value in consolidated financial statements required by Accounting Standard AASB 1024 Consolidated Accounts and Australian Accounting Standard AAS 24 Consolidated Financial Reports, applied in conjunction with Accounting Standard AASB 1013 and Australian Accounting Standard AAS 18 Accounting for Goodwill and Accounting Standard AASB 1015 and Australian Accounting Standard AAS 21 Acquisitions of Assets, does not give rise to a requirement to subsequently revalue those assets in the consolidated financial statements; permits entities to change from the cost basis to the fair value basis, or to discontinue applying the fair value basis, to measure a class of non-current assets at any time in the future, only if such a change satisfies the criteria for a voluntary change in accounting policy in Accounting Standard AASB 1001 and Australian Accounting Standard AAS 6 Accounting Policies ; AASB FEATURES

7 (e) (f) (g) prescribes the method of accounting for revaluation increments and decrements; requires the gain or loss on disposal of a non-current asset to be measured as the difference between the carrying amount and the net proceeds from disposal; and requires various disclosures about non-current assets, including a reconciliation of the carrying amount of each class of property, plant and equipment at the beginning and end of the reporting period. AASB FEATURES

8 ACCOUNTING STANDARD AASB 1041 The Australian Accounting Standards Board makes Accounting Standard AASB 1041 Revaluation of Non-Current Assets under section 334 of the Corporations Act Dated 17 July 2001 F. K. Alfredson Chair AASB ACCOUNTING STANDARD AASB 1041 REVALUATION OF NON-CURRENT ASSETS 1 Application 1.1 This Standard applies to: each entity that is required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act and that is a reporting entity; (c) general purpose financial reports of each other reporting entity; and financial reports that are, or are held out to be, general purpose financial reports. 2 Scope 2.1 For registered schemes, undertakings to which prescribed interests relate, and public sector borrowing/financing entities, this Standard does not apply to financial assets, provided that: the financial assets are measured at net market value as at the reporting date; and any changes in net market value are recognised as revenues or expenses in net profit or loss/result in the reporting period in which the changes occur. AASB

9 2.2 This Standard does not apply to: (c) (d) inventories; foreign currency monetary assets; goodwill; or investments in associates and interests in joint venture entities accounted for by the use of the equity method of accounting Inventories are accounted for in accordance with Accounting Standard AASB 1019 and Australian Accounting Standard AAS 2 Inventories, which prohibit the carrying of inventories at amounts greater than cost Monetary assets are defined in paragraph 9.1 as money held, and assets to be received in fixed or determinable amounts of money. When prices change, the nominal amount of monetary assets will not change as a consequence, but the future economic benefits comprising such assets will. The carrying amounts of foreign currency monetary assets are restated as a result of changes in relevant exchange rates. Accounting Standard AASB 1012 Foreign Currency Translation requires changes in the carrying amounts of foreign currency monetary assets to be accounted for, except in the case of certain hedge transactions, as revenues or expenses in net profit or loss/result in the reporting period in which they are recognised Goodwill is accounted for in accordance with Accounting Standard AASB 1013 and Australian Accounting Standard AAS 18 Accounting for Goodwill, which prohibit the revaluation of purchased goodwill Accounting Standard AASB 1016 and Australian Accounting Standard AAS 14 Accounting for Investments in Associates, and Accounting Standard AASB 1006 and Australian Accounting Standard AAS 19 Interests in Joint Ventures require that, in applying the equity method of accounting to each investment in an associate or each interest in a joint venture entity, the investor or venturer: does not measure its investment or interest on the fair value basis; but AASB

10 Materiality recognises its share of certain post-acquisition movements credited or debited to the asset revaluation reserve of the associate or joint venture entity The standards specified in this Standard apply to the financial report where information resulting from their application is material in accordance with Accounting Standard AASB 1031 and Australian Accounting Standard AAS 5 Materiality. 3 Operative Date 3.1 This Standard applies to annual reporting periods ending on or after 30 September This Standard may be applied to annual reporting periods ending before 30 September An entity that is required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act may apply this Standard to annual reporting periods ending before 30 September 2001, where an election has been made in accordance with subsection 334(5) of the Corporations Act. 3.3 When applied or operative, this Standard supersedes: Accounting Standard AASB 1041 Revaluation of Non- Current Assets, as approved by notice published in the Commonwealth of Australia Gazette No. S 664 on 30 December 1999; and Australian Accounting Standard AAS 38 Revaluation of Non-Current Assets, as issued in December Notice of this Standard was published in the Commonwealth of Australia Gazette on 19 July Purpose of Standard 4.1 The purpose of this Standard is to prescribe the manner in which non-current assets are measured subsequent to initial recognition and require various disclosures about non-current assets. AASB

11 5 Applying a Measurement Basis to a Class of Non-Current Assets Cost or Fair Value Basis 5.1 Subsequent to initial recognition as assets, each class of non-current assets must be measured on either: the cost basis; or the fair value basis, under which revaluations must be made with sufficient regularity to ensure that the carrying amount of each asset in the class does not differ materially from its fair value at the reporting date, subject to paragraphs 5.2 and Entities choose between measuring all of the assets in a class of non-current assets on the cost basis or the fair value basis. This Standard permits some classes of non-current assets to be measured on the cost basis and other classes to be measured on the fair value basis Where consolidated financial reports are prepared, the definition of class of non-current assets is applied to the economic entity as a single entity. Commentary paragraph provides further guidance on the meaning of class of non-current assets. Cost Basis For the purposes of paragraph 5.1, any of the following measures constitutes the use of the cost basis to measure assets within a class of non-current assets: (c) their cost of acquisition, less any accumulated depreciation and accumulated recoverable amount write-downs or impairment losses; in respect of non-monetary assets contributed to the entity, their fair value as at the date of the contribution, less any subsequent accumulated depreciation and subsequent accumulated recoverable amount write-downs or impairment losses; and their carrying amount as at the time that revaluation of that class was discontinued under paragraph 6.1, less any subsequent accumulated depreciation and subsequent AASB

12 accumulated recoverable amount write-downs or impairment losses Measuring at fair value the purchase consideration of assets acquired in order to measure the assets cost of acquisition, as required by Accounting Standard AASB 1015 and Australian Accounting Standard AAS 21 Acquisitions of Assets, does not, of itself, constitute applying the fair value basis to measure assets Accounting Standard AASB 1010 and Australian Accounting Standard AAS 10 Recoverable Amount of Non-Current Assets require a non-current asset measured on the cost basis (including a previously revalued asset that now is measured on the cost basis) to be written down to its recoverable amount when its carrying amount is greater than its recoverable amount. Recoverable amount writedowns or impairment losses and reversals of recoverable amount write-downs or impairment losses are not revaluations. Under AASB 1010 and AAS 10, recoverable amount write-downs or impairment losses recognised in respect of assets within a class of non-current assets are not debited against any balance of the asset revaluation reserve remaining in respect of that class. Fair Value Basis Fair value is defined in paragraph 9.1 as the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. Underlying the definition of fair value is a presumption that the entity is a going concern without any intention or need to liquidate or otherwise wind up its operations or undertake a transaction on adverse terms. Similarly, to determine the fair value of an asset, it is assumed that the asset is exchanged after an adequate period of marketing to obtain its best price. An asset s fair value is measured having regard to the highest and best use of the asset for which market participants would be prepared to pay Where a quoted market price in an active and liquid market is available for an asset, that price represents the best evidence of the asset s fair value. When a quoted market price for the asset in an active and liquid market is not available, its fair value is estimated by reference to the best available market evidence of the price at which the asset could be exchanged between knowledgeable, willing parties in an arm s length transaction. This evidence includes current market prices for assets that are similar in use, type and condition ( similar assets ) and the price of the most recent transaction for the same or a similar asset (provided there has not been a significant change in economic circumstances between the AASB

13 transaction date and the reporting date). Current market prices for the same or similar assets usually can be observed for land, nonspecialised buildings, used motor vehicles, and some forms of plant and equipment. For land and buildings, these prices can also be derived from observable market evidence (for example, observable current market rentals) using discounted cash flow analysis In some circumstances, the market buying price and market selling price of an asset differ materially because the asset usually is bought separately in the new asset market but if sold separately, could only be sold for its residual value. This is often the case for specialised assets. In some other circumstances, an asset is so specialised that there is no market evidence of its market selling price. In either circumstance, an asset may be acquired separately and included in a cash-generating operation, and would only be sold in its current condition as a part of a sale of that cash-generating operation In the circumstances described in paragraph 5.1.8, the asset s fair value is measured at its market buying price. (The best indicator of an asset s market buying price is the replacement cost of the asset s remaining future economic benefits, which is not necessarily the cost of replicating the asset, that is, its reproduction cost). However, where assets belong to a cash-generating operation, and the sum of the market buying prices of the assets forming that cash-generating operation exceeds the fair value of that operation, the fair values of the assets would be determined after deducting that excess. The excess is: first applied against the carrying amount of any purchased goodwill forming part of the cash-generating operation; and for any remainder, eliminated by reducing proportionately the market buying prices of each of the other assets forming part of the cash-generating operation. In performing this process, no asset s fair value is measured at an amount less than its market selling price For the purpose of paragraph 5.1.9, the fair value of a cashgenerating operation would be estimated, in the absence of other market evidence, as the present value of the net cash inflows that market participants would expect the highest and best use of the operation to generate. Frequency of Revaluations Where a class of non-current assets is measured on the fair value basis, the frequency of revaluations depends on the frequency and AASB

14 materiality of changes in the fair values of the assets within that class of non-current assets. Where the fair value of an asset in the class of non-current assets being revalued differs materially from its carrying amount, a revaluation is necessary. Some non-current assets may experience frequent and material movements in fair value, thus necessitating revaluation each reporting period. Such frequent revaluations are unnecessary for non-current assets that experience only immaterial movements in fair value. In these circumstances, revaluation every three years may be sufficient. The requirement in paragraph 5.1 may be met by indexing the carrying amounts of non-current assets in reporting periods between more comprehensive valuations Assets within a class of non-current assets are revalued as at substantially the same date in order to measure those assets at amounts that can meaningfully be aggregated. However, a class of non-current assets may be revalued on a progressive basis within a reporting period provided the carrying amount of each asset within the class does not differ materially from its fair value at the reporting date. Local Governments and Government Departments: Pre-Transfer Carrying Amounts 5.2 Where a local government or government department elects to measure non-current assets transferred to it for no cost of acquisition or for nominal consideration at the amounts at which the assets were recognised by the transferor immediately prior to the transfer under paragraph 72 of Australian Accounting Standard AAS 27 Financial Reporting by Local Governments (as issued in June 1996) or paragraph 7.4 of Australian Accounting Standard AAS 29 Financial Reporting by Government Departments (as issued in June 1998), and the assets are included in a class of non-current assets measured on the fair value basis, those assets need not be revalued until the class of non-current assets is next revalued For assets acquired at no cost or for nominal consideration: by a local government from another local government by virtue of legislation, ministerial directive or other externally imposed requirement; or by a government department as a consequence of a restructuring of administrative arrangements; AASB

15 AAS 27 and AAS 29 provide an option for local governments and government departments to measure these assets at the amounts at which the assets were recognised by the transferor immediately prior to the transfer. Paragraph 5.2 modifies the application of paragraph 5.1 so that it extends this option under AAS 27 and AAS 29 where transferred assets are included within a class of noncurrent assets measured on the fair value basis and their carrying amounts differ materially from their fair value. Instead, those assets would need to be revalued to fair value when the class of noncurrent assets is next revalued When the carrying amounts of transferred assets within a class of non-current assets measured on the fair value basis differ materially from their fair value, as permitted by paragraph 5.2, separate disclosure of the assets measured at fair value and at the transferor s carrying amount is required by paragraph 7.4 of this Standard. Consolidated Financial Statements 5.3 A revaluation of non-current assets to fair value recognised in consolidated financial statements on the acquisition of an equity interest in a subsidiary as required by other Accounting Standards does not give rise to a requirement to subsequently revalue those assets in the consolidated financial statements under paragraph Accounting Standard AASB 1024 Consolidated Accounts and Australian Accounting Standard AAS 24 Consolidated Financial Reports, applied in conjunction with AASB 1013 and AAS 18, and AASB 1015 and AAS 21, require the carrying amounts of the noncurrent assets of a subsidiary to be measured at fair value or, where applicable, fair value less discount on acquisition, in the consolidated financial statements as at the date the parent entity acquires a controlling interest in the subsidiary or as at the date of acquiring a subsequent equity interest in the subsidiary Such a transaction may involve the acquisition of a part of the equity of the subsidiary (which occurs either where a share of the equity of the subsidiary has previously been acquired by the entity, or there exists an outside equity interest), in which case the identifiable assets representing the remainder of the equity of the subsidiary are required by AASB 1024 and AAS 24 to be revalued in the consolidated financial statements. Under paragraph 5.3, such a revaluation does not give rise to a requirement to subsequently revalue those assets in the consolidated financial statements. Where those assets are not subsequently revalued through the adoption of AASB

16 the fair value basis, they are treated as being measured on the cost basis However, where identifiable non-current assets are revalued in the accounting records of the subsidiary, and not just in the consolidated financial statements, paragraph 5.1 applies to the financial statements of the subsidiary. Net Revaluation Increments and Decrements Offsetting of Revaluation Increments and Decrements 5.4 Subject to paragraph 6.2, revaluation increments and revaluation decrements must be offset against one another within a class of non-current assets, but must not be offset in respect of different classes of non-current assets. Recognition of Net Revaluation Increments and Decrements 5.5 Where non-current assets are revalued, the net revaluation increment or net revaluation decrement arising in the reporting period (determined in accordance with paragraph 5.4) must be accounted for as follows: a net revaluation increment relating to a class of non-current assets must be credited directly to an asset revaluation reserve - except that, to the extent that the net increment reverses a net revaluation decrement previously recognised as an expense in net profit or loss/result in respect of that same class of non-current assets, it must be recognised immediately as revenue in net profit or loss/result; and a net revaluation decrement relating to a class of non-current assets must be recognised immediately as an expense in net profit or loss/result - except that, to the extent, and only to the extent, that a credit balance exists in the asset revaluation reserve in respect of that same class of non-current assets, the net revaluation decrement grossed up for any related recognised current tax and deferred tax must be debited directly to the asset revaluation reserve This Standard requires that, in respect of a class of non-current assets, reversals of previous revaluations are, as far as possible, to AASB

17 be accounted for by entries which are the reverse of those by which the previous revaluations were recognised. This policy is applied in conjunction with the requirements of Accounting Standard AASB 1020 and Australian Accounting Standard AAS 3 Income Taxes that current tax and deferred tax that arise in a reporting period are debited (credited) to an asset revaluation reserve if the tax relates to a revaluation increment (decrement) that is or was credited (debited) to the balance of the asset revaluation reserve in respect of a class of non-current assets during the current or a previous reporting period, except to the extent that this treatment of current tax and deferred tax would cause the balance of the asset revaluation reserve in respect of that class of non-current assets to be a debit balance. 1 The Appendix to this Standard provides examples illustrating the accounting treatment of revaluations of non-current assets and their associated income tax effects in accordance with paragraph 5.5, and with AASB 1020 and AAS An example of applying the policy prescribed in paragraph 5.5 is where a net revaluation decrement in respect of a class of noncurrent assets reverses a previous revaluation increment or cumulative revaluation increment in respect of that same class. The credit balance existing in the asset revaluation reserve in respect of a class of non-current assets prior to recognising the revaluation decrement would be net of any current tax and deferred tax recognised in respect of the cumulative revaluation increments and revaluation decrements giving rise to that balance. In accordance with paragraph 5.5, the amount of the revaluation decrement would be debited to the asset revaluation reserve and, in accordance with AASB 1020 and AAS 3, any related current tax and deferred tax would be credited to the asset revaluation reserve, to the extent that a credit balance exists in the asset revaluation reserve in respect of that class of non-current assets. Any excess over that credit balance would then be recognised as an expense in net profit or loss/result for the reporting period in accordance with paragraph 5.5, and any current tax and deferred tax related to that excess would be recognised as revenue in net profit or loss/result for the reporting period in accordance with AASB 1020 and AAS 3. Paragraph 5.5, AASB 1020 and AAS 3 prohibit debiting net 1 References in this Standard to Accounting Standard AASB 1020 and Australian Accounting Standard AAS 3 Income Taxes are to the revised AASB 1020 and AAS 3 issued in December Until adoption of the revised AASB 1020 (which is operative for half-years ending on or after 31 December 2002 and financial years ending on or after 30 June 2003, but may be adopted early) or AAS 3 (which is operative for reporting periods beginning on or after 1 July 2002, but may be adopted early), the entity would not recognise deferred tax assets or deferred tax liabilities in respect of revaluations of noncurrent assets. AASB

18 revaluation decrements (after taking into account any related recognised current tax and deferred tax) to the balance of the asset revaluation reserve in respect of a class of non-current assets to the extent that this would result in a debit balance for the reserve in respect of that class Another illustration of the policy prescribed in paragraph 5.5 is where the earlier net revaluation increment or cumulative increment credited to the asset revaluation reserve (less any related recognised current tax and deferred tax) in respect of a class of non-current assets has been partly or fully utilised by transferring a part or all of it to another reserve such as retained profits (surplus). In this circumstance, under AASB 1020 and AAS 3 the amount transferred to the other reserve is net of any related recognised current tax and deferred tax. Under paragraph 5.5, the amount of the subsequent net revaluation decrement (less any related recognised current tax and deferred tax) which is debited to the asset revaluation reserve is limited to the cumulative balance of prior net revaluation increments remaining in that reserve for the particular class of assets. Once an amount has been transferred from an asset revaluation reserve to another reserve, it is not available for offsetting against future revaluation decrements. That is, a transfer from an asset revaluation reserve is not merely a matter of display; and an amount transferred from an asset revaluation reserve does not retain its character as a balance of an asset revaluation reserve A further example of the policies prescribed in paragraph 5.5 is when the earlier net revaluation increment or cumulative net revaluation increment credited to the asset revaluation reserve (less any related recognised current tax and deferred tax) in respect of a class of non-current assets has been partly utilised by debiting against it a net revaluation decrement (and crediting against it any related recognised current tax and deferred tax) for an asset within that class of non-current assets. For example, a class of non-current assets comprises two holdings of land, described below as Assets A and B. For the purpose of applying AASB 1020 and AAS 3, the income tax rate on capital gains and losses is assumed to be 30 per cent, and the tax base of the assets is assumed to be their cost. It is also assumed that the deferred tax asset arising in respect of the revaluation decrement satisfies the recognition criteria for deferred tax assets in AASB 1020 and AAS 3 regardless of whether a deferred tax liability is recognised in respect of the earlier revaluation increment. The details of these assets are: AASB

19 Details Asset A Asset B Class Tax Effect Asset Reval n Reserve $ 000 $ 000 $ 000 $ 000 $ 000 Cost at X1 1, ,800 Revaluation increment for year ended X2 250 * 250 (75) 175 Carrying amount as at X2 1, ,050 (75) 175 Revaluation decrement for year ended X3 * (150) (150) 45 (105) Carrying amount as at X3 1, ,900 (30) 70 * The fair value of these assets was reassessed, but found not to have changed. The cumulative balance remaining in the asset revaluation reserve in respect of the class of non-current assets as at X3 is $70,000. If Asset A were sold for net proceeds of $1,250,000 during the reporting period ending on X4, thereby realising all of the $250,000 revaluation increment (and all of the related income tax effect of $75,000) originally recognised in respect of that asset, it would not conform with paragraph 5.5 to transfer an amount of $175,000 from the asset revaluation reserve to retained profits (surplus), because it would result in a debit balance of the asset revaluation reserve being recognised in respect of that class of noncurrent assets. The amount of any transfer to retained profits (surplus) [net of any related recognised current tax and deferred tax] would be limited to the cumulative balance of $70,000 in the asset revaluation reserve in respect of that class of non-current assets. 5.6 The balance of an asset revaluation reserve in respect of a class of non-current assets must only be credited with: AASB

20 net revaluation increments recognised for assets within the same class of non-current assets in accordance with paragraph 5.5; and amounts required to be credited to the balance of the asset revaluation reserve in respect of that class in accordance with another Standard Amounts are not transferred to an asset revaluation reserve from another reserve, for example, from retained profits (surplus). This rule applies regardless of the extent to which amounts have previously been transferred from the asset revaluation reserve to other reserves. In the example in paragraph 5.5.4, if Asset B were disposed of, this Standard would not permit an amount equal to the revaluation decrement (net of any related recognised current tax and deferred tax) previously debited against the asset revaluation reserve ($105,000) in respect of the class of non-current assets to be transferred to the asset revaluation reserve from another reserve in order to restore the revaluation increments that related to Asset A Where the boundaries of a class of non-current assets are redefined (for example, because of a change in the functions of particular assets in the entity s operations), a consequential reclassification of a balance of an asset revaluation reserve between classes of noncurrent assets is not a transfer of that balance between classes of non-current assets. Accordingly, paragraph 5.6 does not prohibit the reclassification of a balance of the asset revaluation reserve in respect of a class of non-current assets where the underlying noncurrent assets have been reclassified AASB 1020 and AAS 3, and AASB 1024 and AAS 24 require amounts to be credited to the balance of the asset revaluation reserve in specified circumstances. Treatment of Revaluations of Depreciable Assets 5.7 Subject to paragraph 5.8, where depreciable assets are revalued, any balances of accumulated depreciation existing as at the revaluation date in respect of those assets must be credited to the asset accounts to which they relate. The asset accounts must then be increased or decreased by the amount of the revaluation increments or revaluation decrements. 5.8 Where an entity revalues depreciable assets by reference to current prices for assets newer than those being revalued, and adjusts those amounts to reflect the present condition of the assets, it may restate separately the gross amounts and related AASB

21 accumulated depreciation of the assets comprising the class of revalued assets An entity revaluing a non-current asset may need to estimate its fair value because of, for example, the absence of a market in the relevant second-hand non-current assets. In these circumstances, an estimate of fair value, based on the replacement cost of the asset s remaining future economic benefits, may be made by reference to the market buying price of components used to produce the asset or the indexed price for the asset based on a price from a previous reporting period. Where such estimates have been used, the separate display of gross amounts and related accumulated depreciation may provide users with relevant information which will assist in assessing the condition of the assets by disclosing the expired component of their useful lives, and the possible amount and timing of cash outflows for their replacement Regardless of whether non-current assets are disclosed at gross or net amounts upon revaluation, future depreciation expenses are required to be based on the revalued amounts of the assets (refer to the definition of depreciable amount and related commentary in Accounting Standard AASB 1021 and Australian Accounting Standard AAS 4 Depreciation ). Depreciation expenses based on the gross amount of a revalued depreciable asset are determined by reference to the total useful life of the asset to the entity. Alternatively, depreciation expenses based on the carrying amount of a revalued depreciable asset are determined by reference to the remaining useful life of the asset to the entity. Accordingly, the amount of depreciation expense recognised is identical irrespective of which method of presentation is applied. Disposal of Non-Current Assets 5.9 The gain or loss on disposal of a non-current asset must be measured as the difference between the carrying amount of the asset as at the time of disposal and the net proceeds, if any, from disposal, and must be recognised in net profit or loss/result for the reporting period in which disposal of the asset occurs Paragraph 5.9 deals with the measurement, but not display, of the gain or loss on disposal of non-current assets. Accounting Standard AASB 1004 and Australian Accounting Standard AAS 15 Revenue require the proceeds from the sale of assets other than goods, including non-current assets, to be disclosed separately as revenue. In addition, Accounting Standard AASB 1018 and Australian Accounting Standard AAS 1 Statement of Financial Performance require disclosure of the net gain or loss on disposal AASB

22 of non-current assets that are not measured at net market value. AASB 1018 and AAS 1 prohibit reversing and recognising as revenue within net profit or loss/result any net revaluation increments recognised in the asset revaluation reserve in a previous reporting period. This prohibition is also pertinent to entities that discontinue application of the fair value basis for a class of noncurrent assets (see paragraph 6.3). 6 Changing the Measurement Basis for a Class of Non-Current Assets 6.1 An entity may elect to change from the cost basis to the fair value basis to measure a class of non-current assets, or may elect to discontinue revaluing a class of non-current assets, when and only when the change meets the criteria for a voluntary change in accounting policy in paragraph 6.1(c) of Accounting Standard AASB 1001 and Australian Accounting Standard AAS 6 Accounting Policies, as issued in March Such a change must be applied as at the beginning of the annual reporting period in which the change is made AASB 1001 and AAS 6 require that, when a Standard permits alternative accounting policies, a change from one permitted accounting policy to another permitted accounting policy must be made only when particular criteria are satisfied. The criteria for a voluntary change in accounting policy in AASB 1001 and AAS 6 would rarely be satisfied in respect of the discontinuation of the application of the fair value basis. An example of a circumstance under which the discontinuation of the application of the fair value basis for a class of non-current assets may satisfy the criteria in AASB 1001 and AAS 6 is where there has been a change in the parent entity of the entity or of an entity that controls that parent entity. Changing from the Cost Basis to the Fair Value Basis 6.2 Where an entity changes from the cost basis to the fair value basis to measure a class of non-current assets that includes an asset for which a recoverable amount write-down or impairment loss previously has been recognised as an expense, any increase in the carrying amount of that asset, up to the carrying amount that would have been determined for it had no recoverable amount write-down or impairment loss previously been recognised, must be accounted for as a reversal of the recoverable amount write-down or impairment loss (that is, it AASB

23 must be recognised as a revenue in net profit or loss/result for the reporting period in which the reversal occurs). Any increase in the carrying amount of the asset above the carrying amount that would have been determined had no recoverable amount writedown or impairment loss previously been recognised must, together with any revaluation increments or decrements for the other assets in that class of non-current assets, be accounted for as a net revaluation increment or decrement in accordance with paragraphs 5.4 and Where an entity changes from the cost basis to the fair value basis to measure a class of non-current assets, and a recoverable amount write-down or impairment loss has not previously been recognised in respect of that class, the change is accounted for under paragraphs 5.4 and 5.5. Discontinuation of the Application of the Fair Value Basis 6.3 Where an entity discontinues revaluing a class of non-current assets under paragraph 6.1: it must subsequently measure the assets comprising the class at the date of the discontinuation of revaluation at their carrying amount as at that date less any subsequent accumulated depreciation and subsequent accumulated recoverable amount write-downs or impairment losses; and any balances of accumulated depreciation in respect of that class of non-current assets as at the date of the discontinuation of revaluation must be used as the basis for disclosing the gross amount and any related accumulated depreciation separately in accordance with AASB 1021 and AAS Where revaluation of a class of non-current assets is discontinued, paragraph 6.3 prohibits the making of retrospective adjustments to measure the assets comprising the class as if they had always been measured using the cost basis. This prohibition is a departure from AASB 1001 and AAS 6, which require the cumulative financial effect of a voluntary change in accounting policy to be calculated as if the new accounting policy had always been applied. Those retrospective adjustments are only permitted under paragraph 8.7, where revaluation of a class of non-current assets is discontinued on initial application of this Standard. AASB

24 6.3.2 For assets referred to in paragraph 6.3, as at the date of the discontinuation of revaluation, any balances of accumulated depreciation in respect of those assets are not credited to the asset accounts to which they relate. These balances may have arisen upon the revaluation of a class of non-current assets under paragraph Assets acquired after revaluation of the class of non-current assets is discontinued are measured at their cost of acquisition, less any accumulated depreciation and accumulated recoverable amount write-downs or impairment losses. 7 Disclosures Non-Current Assets Measured at Fair Value 7.1 The financial report must disclose in respect of each class of non-current assets measured on the fair value basis: the method(s) used in determining fair values; and whether the revalued carrying amount has been determined in accordance with an independent valuation Where an asset has previously been revalued based on a valuation conducted by an independent valuer, and is subsequently measured at the same amount because the management or governing body decides that the fair value of that asset is not materially different from the amount previously determined by the independent valuer, such a valuation is deemed not to be an independent valuation for the purposes of the disclosure required by paragraph Where the revalued carrying amounts of some of the assets within a class of non-current assets have been determined in accordance with an independent valuation, disclosure of the carrying amount of the assets within the class that have been determined in accordance with an independent valuation is necessary for compliance with paragraph In respect of investments quoted on a stock exchange, the description at current market value would be sufficient for compliance with paragraphs 7.1 and. 7.2 Where the fair value basis is applied for measuring a class of non-current assets, and the replacement cost of the asset s AASB

25 remaining future economic benefits calculated using an index has been used to determine the fair value of an asset within that class, the financial report must disclose the nature of the index used. 7.3 The financial report must disclose the balance of the asset revaluation reserve for the entity as at the reporting date and, if the entity is a profit-seeking entity, disclose any restrictions on the distribution of the balance to owners Restrictions on distributions of the balance of the asset revaluation reserve to owners that arise from case law or, in the case of trusts, the trust deed, may qualify for disclosure under paragraph 7.3. Local Governments and Government Departments: Pre-Transfer Carrying Amounts 7.4 Where a local government or government department recognises a class of non-current assets that is measured on the fair value basis and that class includes assets that are not measured at fair value, its financial report must disclose: the aggregate carrying amount of each of the following: (i) (ii) assets within that class which are carried at fair value less, where applicable, any accumulated depreciation; and assets within that class which are not carried at their fair value less, where applicable, any accumulated depreciation; and the basis or bases of valuation applied in respect of the amount disclosed in accordance with paragraph 7.4(ii) The disclosures required by paragraph 7.4 need to be made where the fair value basis has been applied by a local government or government department for measuring a class of non-current assets, and that entity has acquired further assets included in that class and carries them at an amount other than fair value. This can occur in the circumstances described in paragraph AASB

26 Discontinuation of Revaluations of a Class of Non- Current Assets 7.5 Where an entity discontinues revaluation of a class of noncurrent assets during the reporting period, it need not apply paragraph 8.5(d) of AASB 1001 and AAS 6, as issued in March Where, under paragraph 6.1, an entity discontinues applying the fair value basis, that change in accounting policy could materially affect the amount of expenses (for example, depreciation expense) recognised in the next reporting period, without necessarily affecting the expenses recognised in the reporting period in which the change in accounting policy is made. Where an entity elects to make that change in accounting policy, paragraph 7.5 sets aside the requirement to disclose the financial effect of the change in the next reporting period specified in paragraph 8.5(d) of AASB 1001 and AAS 6, as issued in March Paragraph 8.5 of AASB 1001 and AAS 6 requires that where a change in an accounting policy did not have a material effect in the reporting period in which the change was made, but has a material effect in the next reporting period, disclosure of the change (including its financial effect) is made in the next reporting period. However, where the change in accounting policy has an effect in the reporting period in which the change occurs, the entity complies with the disclosure requirements in paragraph 8.4 of AASB 1001 and AAS 6. Other Disclosures 7.6 The financial report must disclose, for each class of property, plant and equipment, a reconciliation of the carrying amount at the beginning and end of the reporting period, showing: (c) (d) (e) additions; disposals; acquisitions through acquisitions of entities or operations; the net amount of revaluation increments less revaluation decrements; recoverable amount write-downs or impairment losses recognised in accordance with AASB 1010 or AAS 10; AASB

27 (f) (g) (h) (i) reversals of recoverable amount write-downs or impairment losses; depreciation expense; the net foreign currency exchange differences arising on the translation of the financial statements of a self-sustaining foreign operation; and other movements The entity discloses those items in paragraph 7.6 that are applicable to the class of property, plant and equipment, according to whether the cost basis or the fair value basis is applied to that class. 7.7 Comparative information is not required for the reconciliation specified in paragraph Transitional Arrangements General 8.1 The accounting policies required by this Standard must be applied as at the beginning of the reporting period to which this Standard is first applied. 8.2 For a class of non-current assets that was measured on the cost basis as at the immediately preceding reporting date, an entity may elect to apply either of the following policies on first applying this Standard: continue to apply the cost basis to that class of noncurrent assets in accordance with this Standard; or apply the fair value basis in accordance with this Standard, after making initial adjustments in accordance with paragraph 8.5 if necessary. 8.3 For a class of non-current assets that was measured on a basis other than cost as at the immediately preceding reporting date, an entity may elect to apply either of the following policies on first applying this Standard: revalue the assets in that class of non-current assets in accordance with this Standard, after making initial AASB

28 adjustments in accordance with paragraph 8.5 if necessary; or revert to the cost basis in accordance with paragraph 8.7. Transition to the Fair Value Basis 8.4 Where paragraph 8.6 does not apply and: (c) as at the date of first applying this Standard, an entity elects to initially apply the fair value basis of measuring a class of non-current assets; a public sector entity not required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act initially applies the fair value basis of measuring a class of non-current assets when it ceases to apply paragraph 8.10 during a reporting period beginning on or before 30 June 2003; or a public sector entity (other than a listed corporation) is progressively revaluing a class of property, plant and equipment over more than one reporting period under paragraph 8.13, and during a reporting period no later than the first reporting period beginning after 30 June 2005 revalues a proportion of that class of assets to its fair value; the adjustments necessary to restate the carrying amounts of non-current assets to their fair value must be recognised in accordance with paragraph The adjustments arising under paragraph 8.4 must be accounted for as follows: if the entity is changing from applying the cost basis to that class of non-current assets, and the class includes an asset for which a recoverable amount write-down or impairment loss previously has been recognised as an expense, any increase in the carrying amount of that asset, up to the carrying amount that would have been determined for it had no recoverable amount writedown or impairment loss previously been recognised, must be credited directly to retained profits (surplus) or accumulated losses (deficiency). Any increase in the carrying amount of the asset above the carrying amount AASB

29 that would have been determined had no recoverable amount write-down or impairment loss previously been recognised must, together with the net amount of any revaluation increments or decrements for the other assets in that class of non-current assets, be credited directly to the asset revaluation reserve or debited directly to retained profits (surplus) or accumulated losses (deficiency); and where paragraph 8.5 does not apply: (i) (ii) any net revaluation increment arising upon revaluing those assets to their fair value as at that date must be credited directly to the asset revaluation reserve except that, to the extent that the net increment reverses a net revaluation decrement previously recognised as an expense in net profit or loss/result in respect of that same class of non-current assets, it must be credited directly to retained profits (surplus) or accumulated losses (deficiency); and any net revaluation decrement arising upon revaluing those assets to their fair value as at that date must, to the extent that a credit balance exists in the asset revaluation reserve in respect of that class of non-current assets, be debited directly to the asset revaluation reserve, and any remainder of the net revaluation decrement must be debited directly to retained profits (surplus) or accumulated losses (deficiency) Where the fair value basis initially is applied for a class of noncurrent assets, under the transitional arrangements for initial application of the Standard, amounts are credited or debited directly to retained profits (surplus) or accumulated losses (deficiency) in circumstances in which they would be recognised as revenues or expenses under the requirements for subsequent application of the Standard (set out in paragraphs 5.5 and 6.2) Because paragraph 8.1 requires the accounting policies required by this Standard to be applied as at the beginning of the reporting period to which this Standard is first applied, the net revaluation increment or decrement credited or debited directly to the asset revaluation reserve or to retained profits (surplus) or accumulated losses (deficiency) under paragraph 8.5 is the net increment or AASB

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