Ayariga Ltd acquired its head office on 1 January 2007 at a cost of GH¢10 million (excluding land). The company’s depreciation policy is to depreciate property over 50 years on a straight line basis. Estimated residual value is zero.
On 31 December 2011, Ayariga Ltd revalued the non-land element of its head office to GH¢16 million. In accordance with IAS 16 Property, Plant and Equipment the company has decided not to transfer annual amounts out of revaluation reserves as assets are used. In January 2017 storm damage occurred and the recoverable amount of the head office property (excluding land) was estimated at GH¢5.8 million.
Required:
In accordance with IAS 36 Impairment of Assets, recommend (with workings) how the above transaction should be accounted for as at 1 January, 2017. (5 marks)
View Solution
IAS 36 and IAS 16 require that an impairment that reverses a previous revaluation should be recognised through other comprehensive income to the extent of the amount in the revaluation surplus for the same asset. Any remaining amount should be recognised in the statement of comprehensive income. Thus:
Carrying value at 31 December 2011 is 45/50 X GH¢10m = GH¢9m
The revaluation reserve (GH¢16 – GH¢9) = GH¢7m
The carrying amount at the 31 December 2016 is 40/45 x GH¢16 = GH¢14.2m
The recoverable amount at 31 December 2016 = GH¢5.8m
The total impairment charge is (GH¢14.2 -GH¢5.8) = GH¢8.4m
Of this, GH¢7m is a reversal of the revaluation reserve, so only GH¢1.4m is recognised through the statement of comprehensive income.