Sep 2020 Q19 - revaluation of property

[Euan Ritchie]

Hello,

I’m confused about treatment of property revaluation. In the core reading, it says very explicitly that

“a gain on the revaluation of a property will go to the revaluation reserve. Any such gains are not shown in the statement of profit or loss…”

However, in Q19 in the September 2020 paper, the loss on revaluation of property of 208 is included in cost of sales, which therefore ends up the in statement of profit or loss.

It seems really odd to me that the sign of the revaluation makes a difference to where it ends up the financial statements: why would negative revaluations be include in the statement of profit or loss but not positive ones? Am I missing something? Otherwise, I would love some help understanding this.


Thanks


Euan

 

[Jamie]

Hey Euan,

At the bottom of page 288 of the CMP it says that any downward revaluation will be charged as an expense to the P&L if the asset is still used within the business. If the loss on revaluation is enough to offset previous gains on revaluation then the revaluation reserve figure in the equity section of the balance sheet will be reduced.

For example, if the balance sheet had a revaluation reserve of 100k and an asset was revalued at 30k lower than its current value then the revaluation reserve would show as 70k for the current year.

If however, there is no revaluation reserve then the 30k would be charged as an expense to the P&L.

Hope this helps.

Jamie

 

[Lucy England]

This treatment avoids a scenario where there is a negative revaluation reserve:

Positive revaluation

Statement of financial position (SFP):
+ non-current assets
+ revaluation reserve
So the equation assets = equity + liabilities still holds

Statement of comprehensive income:
+ Other comprehensive income (OCI)
OCI is below profits for the year (which go into retained earnings on the SFP) so this means the SFP still balances.

Negative revaluation (no existing revaluation reserve)

Statement of financial position:
- non-current assets
- retained earnings (see below)
So the equation assets = equity + liabilities still holds

Statement of comprehensive income:
- profits for the year
Profits for the year go into retained earnings on the SFP

Just a note on Q19 September 2020 - IIRC the examiners were fairly flexible about where the downward property revaluation was recognised. The solutions have this in cost of sales, but it could have been any kind of expense - so long as it hits profits for the year and reduces the retained earnings as above. This question was difficult since the Core Reading on downward revaluation of property is minimal - there's just a sentence in Section 5 of Chapter 9 (4th paragraph) that says "any loss on revaluation should be included in that period's statement of profit or loss". If you had set up a negative revaluation reserve then you would still get method marks for the rest of your calculations.

Sorry for such a long response! I hope this helps to give this rather odd treatment a bit of context.