ACCA Strategic Business Reporting (SBR) Practice Exam

When property, plant, and equipment (PPE) is revalued and there is excess depreciation due to this revaluation, the treatment of this excess depreciation involves transferring the amount from the revaluation surplus to retained earnings.

This practice aligns with the International Financial Reporting Standards (IFRS), particularly IAS 16 on Property, Plant and Equipment. Under this standard, when an asset is revalued and subsequently depreciated, any excess depreciation that exceeds what would have been recognized under the original cost basis is effectively considered as a reduction in the previously recognized revaluation surplus. This transfer reduces the revaluation surplus, which reflects unrealized gains associated with the asset, thus ensuring that the profit or loss reported in the income statement accurately reflects the actual performance of the entity.

By transferring this excess depreciation to retained earnings, the accounting treatment maintains the balance sheet's integrity and provides clearer insight into the overall equity position of the company. Retained earnings are affected by actual costs incurred, and this treatment ensures that the income statement reflects true operational performance without inflation from unrealized gains.

This approach fosters a more faithful representation of the financial statements, as it prevents the reporting of gains that might not be realizable if the asset were to be sold in the future