Delali Ltd adopts revaluation model for subsequent measurement of its intangible assets in accordance with IAS 38: Intangible assets. The policy of Delali is to revalue its intangible asset at the end of each year. An intangible asset with an estimated useful life of 9 years was acquired on 1 January 2016 for GH¢45,000. It was revalued to GH¢54,400 on 31 December 2016 and the revaluation surplus was correctly recognized on that date. As at 31 December 2017, the asset was revalued at GH¢32,000.
Required:
Discuss the accounting treatment required in 2016 and 2017 financial statements. (4 marks)
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In 2016
- The income statement for 2016 shows an amortization of GH₵5,000 [GH₵45,000/9years]
- The statement of financial position as at 31 December 2016 shows the following
- The asset at a carrying amount of GH₵54,400 [under non-current assets]
- A revaluation surplus of GH₵14,400 [GH₵54,400 – GH₵40,000] is shown under equity.
In 2017
- Amortisation of GH₵6,800 [GH₵54,400/8 years (remaining useful life)] is charged to income statement.
- A transfer should be made from revaluation surplus to retained earnings through the statement of changes in equity of the excess depreciation of GH₵1,800 [6,800 charged less 5,000 (45,000/9) based on the original cost], and thereby reducing
the revaluation surplus to GH₵12,600. - The carrying amount of the intangible asset as at 31 December 2017 is now GH₵47,600 [GH₵54,400 – GH₵6,800] but this should be reduced to GH₵32,000.
- The revaluation deficit is GH₵15,600 of which GH₵12,600 should be recognized in other comprehensive [reducing the revaluation surplus to nil and the GH₵3,000 remainder is recognized as an expense in the income statement).