Accounting For Land Revaluation: Increase and Decrease Revaluation.

Recognition

The land is recognized as an asset when it is probable that the entity will receive future economic benefits from it, and the cost of the land can be reliably measured. 

The land cost comprises the purchase price, directly attributable costs to bring the land to its current location and condition, and estimated expenses for dismantling, removing the asset, and restoring the site upon abandonment.

Measurement

Land measurement is typically based on its cost unless the land has undergone revaluation as per the guidelines of IAS 16. 

In the case of revaluation, the land is measured at its revalued amount, reduced by any subsequent accumulated depreciation (if it is under IFRS 16) and impairment losses.

Classification

The land is classified into two categories: investment property and property, plant, and equipment.

Investment property refers to land and buildings held for rental income or capital appreciation.

Property, plant, and equipment comprise land and buildings for producing or supplying goods or services, rental to others, or administrative purposes.

Specific requirements

There are specific requirements outlined in ISA 16 for the accounting treatment of land, including:

  1. Land under development for future use is only recognized as an asset once it reaches a significant completion stage and is ready for its intended purpose.
  2. Land held for sale in the ordinary course of business is not recognized as an asset.
  3. Land subject to a right of use is recognized as a right-of-use asset following the guidelines of IFRS 16.

Impairment:

The land is subject to impairment testing by IAS 36. An impairment loss is recognized if the carrying amount of land exceeds its recoverable amount. 

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This ensures that the value of land is adjusted if its estimated future economic benefits decline, reflecting its diminished value.

How to Recognize Land Revaluation Gain Under IAS 16?

Under IAS 16, land revaluation gains are recognized in other comprehensive income and accumulated in equity under the heading of revaluation surplus.

Here is what the standard said 

“If an asset’s carrying amount is increased as a result of a revaluation, the increase shall be recognized in other comprehensive income and accumulated in equity under the heading

of revaluation surplus.”

When recognizing land revaluation gains under IAS 16, it’s essential to consider the following aspects:

  1. Reliable Measurement: The gain should be measured dependably, which requires objective determination of the land’s fair value.
  2. The permanence of Gain: A gain is only recognized if it is expected to be sustained over the short term. Transitory gains are not recognized.
  3. Allocation to Asset Class: The gain should be allocated to the same asset class as the land. For instance, if the land is categorized as an investment property, the gain must be given to the asset class.
  4. Reversal of Gain: If a land revaluation gain is subsequently reversed, it is then recognized in the statement of profit or loss. Any previously recognized revenue will be considered a loss in the income statement.”

Note: Please ensure that the information provided aligns with the current financial reporting standards and guidelines, as they may evolve.

For example, if the fair value of the land decreases, the revaluation gain is reversed and recognized as a loss in the statement of profit or loss.

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Here is an example of how to land revaluation gains are recognized under IAS 16:

On January 1, 2023, a company purchased a piece of land for $1 million.

The land was revalued on December 31, 2023, and the fair value is $1.2 million.

  • The company recognizes a revaluation gain of $200,000 in other comprehensive income.
  • The carrying amount of the land is increased to $1.2 million.

Here is the journal entry:

Dr. Land $200,000

Cr. Other comprehensive income – revaluation $200,000

So, $ 200,000 is recognized in other comprehensive income and accumulated in equity under the heading of revaluation surplus.

What if there is a revaluation loss?

How to Recognize Land Revaluation Loss Under IAS 16?

Here is what the standard said on revaluation loss,

When there is gain, 

“If an asset’s carrying amount is increased due to a revaluation, the increase shall be recognized in other comprehensive income and accumulated in equity under the heading of revaluation surplus.”

When there are revaluation losses, 

“However, the increase shall be recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognized in profit or loss.”

Example, 

On January 1, 2023, a company purchased a piece of land for $1 million.

The land was revalued on December 31, 2023, and the fair value is $8 million.

The company recognizes a revaluation loss of $200,000 in profile and loss.

What if there is a revaluation gain and then losses?

For example,

On January 1, 2023, a company purchased a piece of land for $1 million.

The land was revalued on December 31, 2023, and the fair value is $1.2 million.

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On February 28, 2023, the land was revalued to $8 million.

Here is what the standard said, 

“If an asset’s carrying amount is decreased due to a revaluation, the decrease shall be recognized in profit or loss. 

However, the decrease shall be recognized in other comprehensive income to the extent of any credit balance existing in the revaluation surplus in respect of that asset. 

The decrease recognized in other comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus.”

In this case, the company should recognize as follow:

  • On January 1, 2023: The company should recognize land at a cost: $1 million.
  • On December 31, 2023: The company should recognize a revaluation gain amounting to USD200,000 in other comprehensive income and revaluation surplus in the statement of change in equity.
  • February 28, 2023: recognize revaluation losses of USD200,000 in profit and losses, derecognize USD200,000 from revaluation surpluses and USD400,000—Derecognize USD400,000 from land.