Company Valuation Under IFRS : Interpreting and Forecasting ...

Chapter Seven – An introduction to consolidation
been subject to revaluations will produce lower profits on disposals. A further
adjustment is required for revalued assets as the balance in the revaluation
reserve must be transferred to retained earnings as this amount has now been
realised.
Example
Value place Inc. has disposed of two fixed assets. Asset 1 has not been revalued
and the the relevant information together with profit on disposal and required
adjustments is given below. The same information is given for Asset 2 but it
has been revalued upward by 26,000 some years ago.
Note that:
• It incurs a loss on disposal. If assets have been revalued then there will be
systematically lower profits on disposal or higher losses compared with
assets that remain at historical cost.
• A transfer must be made of the balance on the revaluation reserve that
relates to Asset 2. This amount is now realised and would be available to
distribute, etc.
Exhibit 7.11: Accounting for asset disposals
Asset 1 Asset 2
Cost/revalued amount 124,590 178,435
Accumulated dep’n -45,876 -34,999
Net book value 78,714 143,436
Disposal proceeds 234,000 139,000
Profit/(loss) 155,286 -4,436
Adjustments
Accumulated dep’n -45,876 -34,999
Revaluation reserve -26,000
Retained earnings
Profit on disposal 155,286 -4,436
Revaluation transfer 26,000
Disposal of shares
The treatment of share disposals is more complex and diverse as it depends on
the accounting treatment of the underlying investment. In turn this depends on
the relationship between the investor and investee companies.
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