Valuation Revaluation & Impairment

Valuations, Revaluations and Impairment Adjustments are closely related events in asset management. In the context of the accounting standards they relate directly to the 'measurement of asset carrying values after recognition'. Whether the cost model or the revaluation model is adopted, Activa provides dedicated functionality and a full transaction audit history for each approach.

It should be clear from the outset however, that as a software solution, Activa concerns itself less with the underlying reasons for an asset valuation than with the detail of the event itself. Similarly, it is concerned more with the accounting process and the method of application of a revaluation transaction and its outcomes than with the reason for the transaction in the first place. Likewise with an impairment adjustment. In all cases, the general assumption is made that the underlying reasons for these transactions are sound and that they are in line with generally accepted accounting practice.

Valuations, of themselves, do not change the carrying value of an asset in any way. The valuation of an asset at any time, is an assessment of its worth usually by experienced professionals against some prescribed criterion. There are many different reasons and assessment criteria that give rise to an asset valuation. Examples are 'current market value', 'fair value', 'economic value', 'insurance replacement cost', 'recoverable value', 'value in current use' etc. Activa records the details and stores the associated supporting documentation and references but, in the context of asset management, all valuations are purely informational unless subsequently applied as a revaluation or impairment transaction.

Valuations in Activa can be applied as individual entries or by mass data import at any time, without a corresponding revaluation transaction being applied to the asset. The first valuation recorded for any asset is automatic and is its acquisition value. During a normal asset life-cycle there could be any number of valuations undertaken for various different reasons and once recorded this history is permanent and can be viewed directly on-line as shown below.

Whatever the basis of assessing the valuation of an asset at any time, whether it be the fair-value determined from market-based information or some other criterion, it is essentially the net realisable value for the given circumstances. It is this value that represents the new carrying value following the application of a revaluation transaction. Multiple revaluations may be required during the life of an asset and these need to be stored as separate, distinct events.

When an asset is revalued its carrying value in the financial accounts is changed; either increased, as in the event of a revaluation increment or, decreased, as in the event of a decrement, or devaluation. Since any change to the carrying value, by implication, means that there has been a re-appraisal of its value, a separate valuation record is automatically created for this event when applying a revaluation transaction.

Depending upon the relevant accounting standard Activa provides two fundamental revaluation methods;

This is the most common and widely used revaluation methodology and is based on the current realisable value of the asset [though this is not strictly the case in practice]. ‘Reduction to net value’ implies that all accrued depreciation is written back against the asset cost reducing the net carrying value in the asset account to that of the written down value.

The difference between the newly assessed value of the asset and its current written down value is the 'revaluation difference'. It may be positive [an increment] or negative [a decrement]. This revaluation difference is applied to both the written down value and the cost base of the asset.

In the case of an increment, a similar value is added to the Capital Revaluation Reserve [CRR] to account for the increased carrying value. However, any previous asset write off amount in the P&L should first be credited. In the case of a decrement, it is firstly offset against previous increments in the CRR. Where a decrement exceeds the balance in the CRR, the remainder must be written off through the P&L.

This revaluation methodology invariably applies to infrastructure assets and is now most widely used by the government sector, though not exclusively. Historically, it has also been associated with ‘current cost accounting' though this approach is now much less common in industry generally. It seems to attract more attention when economic inflation rates are high.

The basic approach is to assess the current replacement cost of an asset and to apply this as a depreciated value; that is, split the replacement cost between the accumulated depreciation and the written down value. The proportion used is determined according to the current depreciated status of the asset as if it had been depreciated from the 'current replacement cost' at the historical same rate. Therefore, if an asset is 63% depreciated prior to the revaluation, then the replacement cost valuation is apportioned 63% to the accumulated depreciation and 37% to the written down value.

The net increase in carrying value is the difference between the new written down value and the written down value immediately prior to the revaluation having taken place.

The use and application of these two methods is determined by the prevailing accounting standard but a general rule of thumb is that general property uses RNV whilst long term infrastructure type assets use the WDRC method. The latter is certainly more appropriate to local and regional government assets.

Revaluation is not generally used for items of depreciating plant and equipment unless they are subject to the accounting standard for investment property, IAS 140 or its equivalent, where the value of property tends to be vested in the 'core' asset. It may also be applied to plant and equipment in a situation where 'fair value' is applied to assets following a merger, or take-over/acquisition.

The accounting standards require that if an item of property, plant and equipment is revalued, then the entire class of equipment to which it belongs must also be revalued. Generally, this means that the number of transactions to be applied could be extensive. Activa provides facilities for both individual and bulk revaluation processing making the entire exercise very simple and straight-forward.

Impairment occurs when the economic value of an asset falls below its carrying value [or net book value]. This implies that the current carrying value of the asset may not be economically recovered in its current circumstances over its remaining useful life.

Under IAS 16, the measure of asset carrying values for the sake of identifying the existence of an impairment is deemed to be their recoverable amount. In practice, this would be the higher of its realisable value, if it were sold, or alternately, its net present value in its present use; i.e. its economic value.

Realisable values are generally applied by one of two methods; the cost model, or the revaluation model.

Activa has the ability to record one or more impairment adjustments against individual or multiple assets as required. It also has the ability to apply reversals of impairments in cases where the economic value of an asset is subsequently found to be restored.

Realisable values are generally applied by one of two methods; the cost model, or the revaluation model.

Under the cost model, the carrying value is deeemed to be the original cost less accumulated depreciation less any previously accumulated impairment losses. As described above, for the revaluation model, the asset is carried at a revalued amount less any subsequent accumulated depreciation and any accumulated impairment losses.

Practically speaking, this implies that for realisable values that are greater than the carrying value, the revaluation model is used.

In the event of an actual impairment of the asset value, a decrease in its realisable value, the impairment adjustment method is used.

Unlike a revaluation, an impairment adjustment is simply a re-statement of the current carrying value using an adjustment to the current period depreciation that is then expensed directly through the P&L. Where the economic value of an impaired asset is subsequently found to be restored the cost model should be used; i.e. the previous impairment should be reversed.

The standard Activa GL Interface module interprets asset revaluation transactions on an individual basis and generates the appropriate journals to comply with the international accounting reporting standard.

It automatically assesses the status of the capital revaluation reserve and asset write off accounts for any revalued asset group to determine the appropriate sequence for asset processing and the resulting journal values for each, including the tax effect, if required.

In addition to the tax effect resulting from movements in the net carrying value of an asset, revaluations give rise to permanent differences and timing differences in the capital cost recovery period of the asset between the financial and tax accounts.

Timing differences of course, will normally be fully resolvable over the life of asset unless they are subject to a net devaluation [where total decrements exceed total increments]. In this situation the timing difference is not fully resolvable and can only be totally resolved by a balancing charge on final disposition of the asset.

Since impairment adjustments are applied as direct adjustments to the depreciation they result in timing differences only.

To assist in the evaluation and reporting of timing differences, Activa produces separate accurate assessments of the periodic depreciation charges for the original cost component and the revalued cost component of a revalued asset. However, it is simply not possible to produce accurate inputs for tax effect accounting unless a complete and accurate record of historical revaluations and impairments is stored on the system for each individual asset.

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Article last updated : Feb 23 2012 10:15AM