Property, Plant & Equipment: Q6

Q6: If, as a result of a revaluation, the carrying amount of an item of Property, plant and equipment is increased, is this increase in value included in a firm’s profit and loss for a period?

A:

No, it is not.

If, as a result of a revaluation, the carrying amount of an item of Property, plant and equipment is increased, this increase in value is included in Other comprehensive income and transferred directly to an Asset revaluation reserve. For example, in 2017 Ryman Healthcare revalued a class of its Property, plant and equipment (Freehold land) upwards by $56.5m (see Ryman Healthcare 2017 Annual Report footnote 6, p.35; and also in Figure 5.2 in Section 5.3 below) and this amount was included in Other comprehensive income in its Consolidated Statement of Comprehensive Income (see Ryman Healthcare 2017 Annual Report p.20). It was also included in Ryman Healthcare’s Asset revaluation reserve in Equity in its Consolidated Balance Sheet, resulting in an increase in its Asset revaluation reserve of $56.5m from $176.8m (in 2016) to $233.3m (in 2017) (see Ryman Healthcare 2017 Annual Report footnote 14, p. 40). None of this upward revaluation of Property, plant and equipment of $56.5m was included in Ryman Healthcare’s Profit for the period of $356.7m in its Consolidated Income Statement. So this is what happens if a firm revalues upward a class of Property, plant and equipment. The increase is not included in a firm’s profit and loss for a period (but is included in Other comprehensive income) and is transferred directly to an Asset revaluation reserve.

Study Guide Chap 5 page 5-9

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