Revaluation of Fixed Assets in M3 According to IAS 16

This document describes the M3 solution for revaluing fixed assets when the fair value (also called market value or recoverable amount) of the assets is not equal to their carrying amount in the general ledger, according to IAS 16.

About the IAS Standards and IAS 16

IAS is the acronym for International Accounting Standards issued by the board of International Accounting Standards Committee. In April 2001, the International Accounting Standards Board adopted all IAS and new standards issued thereafter were called International Financial Reporting Standards, IFRS. IFRS is also used as a collective term for both the older IAS and the new IFRS standards.

The IAS 16 standard prescribes the accounting procedure for property, plant, and equipment. These are tangible items that are:

Held for use in the production or supply of goods or services, for rental to others, or for administrative purposes.
Expected to be used for more than one period.

The purpose is to keep the general ledger updated with the actual value of such tangible items and enable users of the financial statements to find information about the business' investment in these tangible items.

Any surplus of the revaluation is recognized directly to equity, not in the income statement. Any deficits are recognized as expenses in the income statement. The depreciation is adjusted to write off the cost of the assets over its life time – its estimated useful life – down to the fair value. The cost of depreciation is recognized as an expense in the income statement unless it is included in the carrying amount of another asset.

The depreciation method used is usually linear depreciation, with a straight line of depreciation, although other depreciation methods such as declining balance depreciation can be used if assets are used more in some periods than others.

The revaluation is done at least annually, usually at year end.

Constraints in M3 Business Engine

The property, plant, and equipment referred to in the IAS/IFRS must be registered as fixed assets in 'Fixed Asset. Open' (FAS001).
The revaluation method supported by M3 Business Engine is the gross value method.

Setup


Task	Comments
1. Create value types for the following types of amounts in 'FA Value Type. Open' (FAS060): revaluation amount, revaluation increase value (the value with which the asset is increased due to the revaluation) revaluation decrease value, and adjusted acquisition cost.	A value type is a company-defined "container" for a specific type of amount related to the management of assets. Technically, you can reuse existing value types for the revaluation-related amounts.
2. Connect these value types to a fixed asset type in 'FA Type. Connect Depreciation Types' (FAS077).	Since a fixed asset is revalued to fair value if the entire group of assets to which it belongs is so treated, the normal procedure is to connect the value types directly to the fixed asset type and not to the individual assets. (FAS077) is accessed from 'FA Type. Open' (FAS075).
3. Create a new depreciation type for linear depreciation in 'Depreciation Type. Open' (FAS050).	The depreciation type defines the period from which to start calculating depreciations and how often. This depreciation type will depreciate the difference between the recorded amount and the fair value. The solution only works with a depreciation type for linear depreciation. Note: When the corporate accounting additional features for fixed asset is used, the new depreciation type must belong to the same accounting ledger of the depreciation that is being revaluated.
4. Connect the depreciation type to use for the revaluation to the applicable fixed asset types in (FAS077). The value type representing the acquisition cost for the depreciation type must be the value type representing the revaluation amount.
5. Select the same value types and the same depreciation type to use for the revaluation in 'Settings – Fixed Asset Revaluation' (FAS910).	M3 Business Engine identifies the value types to update for an asset based on your selection in (FAS910).
6. Define these accounting rules in 'Accounting Rule. Set' (CRS395): FA90-500, FA90-550, FA90-590.	These accounting rules will be used to create the voucher for the adjustment of the assets' recorded value: FA90-500: Represents the amount with which the recorded acquisition value of an asset was increased or decreased as a result of the revaluation. FA90-550: Represents the amount with which the recorded accumulated depreciation was increased or decreased. FA90-590: Represents the account entry offsetting FA90-500 and FA90-550.

Activity description

At year end, specify an accounting date, a revaluation date and the fair value of the asset in 'FA Depreciation. Revaluate' (FAS110). The rest of the workflow is completely automated.

M3 Business Engine checks whether any depreciations have been made up to the revaluation date. If there are no previous depreciations, M3 Business Engine automatically creates them. The new values are calculated in these ways:

The revalued acquisition cost is calculated using the formula: (revaluation amount / net amount) * original acquisition cost. The difference between the original and the revalued acquisition cost is debited to the acquisition balance account based on accounting rule FA90-550.
The revalued depreciation amount is calculated using the formula: (revaluation amount / net amount) * original depreciation amount. The difference between the original and the revalued depreciation is credited to the depreciation balance account, based on accounting rule FA90-500.

The revaluation amount, that is, the difference between the increase/decrease of the depreciated amount and the acquisition cost respectively, is automatically credited to a balance account for revaluation, based on accounting rule FA90-590. The revaluation amount is also used as the acquisition cost for a separate depreciation type reserved for revaluations. If the fair value is higher than the recorded value, then the acquisition cost will be negative. The life time of this depreciation type is automatically set as equal to the remaining life time according to the original depreciation type and the amount will be depreciated during this period of time. To indicate that the depreciation type was activated at a revaluation and was not used from the beginning, it will automatically belong to period type 5 = 'Revaluation date', as displayed in 'Fixed Asset. Connect Depreciation Types' (FAS002/E).

The affected value types of the fixed asset – that is, the value types specified in (FAS910) and the value types for depreciations and acquisition cost – are automatically updated. The new values are displayed in 'Fixed Asset. Connect Value Type' (FAS003), which is accessed from (FAS001/B).

After the revaluation, you can view the individual transactions by selecting option 11 = 'Display FA value per period' for the value type that stores the acquisition cost. 'FA Value. Display per Period' (FAS220) is then displayed. By selecting option 12 = 'Display voucher' for the line representing the depreciation in that period, the individual voucher accounting lines are displayed in 'Voucher. Display' (GLS200):

The increased value, based on accounting rule FA90-550
The increased depreciation, based on accounting rule FA90-500
The offsetting account entry, based on accounting rule FA90-590.

If another revaluation is made later, the amount credited to the balance account for revaluation is automatically reversed by the depreciation on the value type for revaluation amount.

Example

A fixed asset has an acquisition cost of EUR 15,000. The asset is depreciated using the linear depreciation method and has a lifetime of 15 years (180 months). After five years of monthly depreciations, that is, after 60 months, the recorded value of the asset is EUR 5,000. However, the fair value of the asset is actually EUR 6,800 so at year end the user enters the fair value in (FAS110) and triggers the revaluation.

The updated value type amounts in (FAS003) are:

Acquisition cost: 20,400
Depreciation year-to-date: 6,800
Planned depreciations: 13,600
Adjustment amount: 5,400
Revaluation amount: -3,600
Revaluation increase value: -3,600

By drilling down from the value type storing the acquisition cost, the user can view the voucher accounting lines in 'Voucher. Display' (GLS200):

The increased value: +5,400
The increased depreciation: -1,800
The offsetting account entry: -3,600
Note: When corporate accounting and reporting additional for fixed assets is used in the updated value type in (FAS003):
- Acquisition cost: 15,000
- Adjustment - local: 5,400 (the depreciation type used updates the local accounting ledger)
- Adjustment of +5,400 is also displayed in 'Fixed Asset. Depreciate' (FAS010).