Q7: If, as a result of a revaluation, the carrying amount of an item of Property, plant and equipment is decreased, is this decrease in value included in a firm’s profit and loss for a period?

A:

Yes, it is.

Unlike upward revaluations, downward revaluations for an item of Property, plant and equipment are generally included in a firm’s profit and loss for a period. If an item of Property, plant and equipment is decreased as a result of a revaluation then generally:

“…the decrease shall be recognised in profit or loss.”

AASB 116 para 40

This means they are then transferred to Retained earnings as part of Equity. As we saw above, this differs to upward revaluations for an item of Property, plant and equipment, which are included in Other comprehensive income and transferred to an Asset revaluation reserve (and not to Retained earnings). The only exception to this is when the downward revaluation reverses (in whole or in part) a previous upward revaluation of that asset (in which case the decrease is included in Other comprehensive income and reduces the Asset revaluation reserve).

Study Guide Chap 5 page 5-9