IAS 36 Question 3

QUESTION 3 – IAS 36 Impairment of Assets (ICAP C6 A09)

Faraday Pharmaceutical Limited (FPL) acquired a building for Rs. 200 million on July 1, 2005. The
following information relating to the building is available:
(i) It is being depreciated on the straight line basis, over 20 years.
(ii) FPL uses the revaluation model for subsequent measurement of its property, plant and
equipment and accounts for revaluations on the net replacement value method. The details
of revaluation carried out by the independent valuers during the past years are as follows:
Fair value
Revaluation date
Rupees in million
July 1, 2006 230
July 1, 2007 170
July 1, 2008 180

(iii) FPL transfers the maximum possible amount from the revaluation surplus to retained
earnings on an annual basis.
(iv) There is no change in the useful life of the building.

Required:
Prepare the journal entries to record the above transactions from the date of acquisition of the
building to the year ended June 30, 2009. (Ignore deferred tax) (16)

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IAS 36 Question 3

ANSWER 3 – IAS 36 Impairment of Assets (ICAP C6 A09)

Date Particulars Dr. Rs’000 Cr. Rs’000

01.07.05 Building 200,000

Bank 200,000
(Record purchase of plant)

30.06.06 Depreciation 10,000

Accumulated depreciation – Building 10,000
(Depreciation for the year 2005-06)
Rs. 200,000/20 years = Rs. 10,000
01.07.06 Accumulated depreciation - Building 10,000
Building 30,000
Surplus on revaluation of assets 40,000
(Recording of revaluation surplus and elimination of
previous accumulated depreciation)
Rs. 230,000 – (Rs. 200,000 – Rs. 10,000) = Rs. 40,000
30.06.07 Depreciation 12,105
Accumulated depreciation – Building 12,105
(Depreciation for the year 2006-07)
Rs. 230,000/19 years = Rs. 12,105

30.06.07 Surplus on revaluation of assets 2,105

Retained earnings 2,105
(transfer of excess depreciation to realized profits)
Rs. 40,000/19 years = Rs. 2,105
01.07.07 Accumulated depreciation – Building 12,105
Surplus on revaluation of assets (Rs. 40,000-2,105) 37,895
Revaluation loss (Rs. 47,895 – 37,895) 10,000
Building 60,000
(Recording of revaluation surplus and elimination of
previous accumulated depreciation)
Rs. 170,000 – (Rs. 230,000 – Rs. 12,105) = Rs. 47,895
30.06.08 Depreciation 9,444
Accumulated depreciation – Building 9,444
(Depreciation for the year 2007-08)
Rs. 170,000/18 years = Rs. 9,444
01.07.08 Accumulated depreciation – Building 9,444
Building 10,000
Reversal of revaluation loss 9,444
Surplus on revaluation of assets (ß) 10,000
(Recording of revaluation surplus and elimination of
previous accumulated depreciation)
Rs. 180,000 – (Rs. 170,000 – Rs. 9,444) = Rs. 19,444
Loss can be reversed in income statement upto Rs.
170,000 i.e. (Rs. 200,000 – (Rs. 10,000 depreciation x 3
years)
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IAS 36 Question 3

30.06.09 Depreciation 10,588

Accumulated depreciation – Building 10,588
(Depreciation for the year 2008-09)
Rs. 180,000/17 years = Rs. 10,588

30.06.09 Surplus on revaluation of assets 588

Retained earnings 588
(transfer of excess depreciation to realized profits)
Rs. 10,000/17 years = Rs. 588

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