Smith & Sons Accounting Firm
423 Pitt Street, Knowledgebank
Sydney NSW 2999
2 May 2006
Mr. lan Dunno – CEO of Techno Ltd
445 Smith Street,
Notsureville, NSW 2555
Dear Mr. Dunno
Re: Accounting Issus
Response to your question in the email, I’m very glad to prepare a report to give you more advice and explanation to the accounting issues.
Yours sincerely
Lu Nan
Smith & Sons Accounting Firm
Enc. Report
Issue 1
According to Australian Accounting Standards Board (AASB) 116 Para.30, “After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses.” It is possible to revalue the assets every three or five years.
It is obviously that the assets should be revalued when the fair value is materially different from the carrying amounts, based on AASB 116, since some properties of the enterprise have doubled in value since they were purchased 4 years ago. In other words, the aim of revaluation is to be sure that the carrying amounts of assets are equal the fair value in the balance sheet.
The principle of applying the revaluation model of increment is contained in Para 39 and 40 of AASB 116. “If and assent’s carrying amount is increased as a result of a revaluation, the increase shall be credited directly to equity under the heading of revaluation reserve…” It means that the increase is considered directly as equity, rather than appears in income statement. Hence, a revaluation increment is credited to an asset revaluation reserve unless the incremen ...