Revaluation model and active market requirement

Learning objectives

• Determine whether the revaluation model can be applied, given whether an active market exists.L3
• Justify carrying an asset in a revalued class at cost because there is no active market.L3, L4
• Calculate the revaluation surplus of an intangible asset traded in an active market.L3
• Identify the limits of the revaluation model (asset not previously recognised, initial measurement, rarity of active markets).L3
• Recognise the transfer of the revaluation surplus to retained earnings, without going through profit or loss.L3

Normative references

• IAS 38 §75Revaluation model: after initial recognition, the intangible asset is carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated amortisation and any subsequent accumulated impairment losses; fair value is measured by reference to an active market. Revaluations are made with such regularity that the carrying amount does not differ materially from fair value at the end of the reporting period.
• IAS 38 §76Limits of the revaluation model: it does not allow the revaluation of an intangible asset that has not previously been recognised as an asset, or the initial recognition of an intangible asset at an amount other than its cost. Revaluation takes place only after initial recognition at cost.
• IAS 38 §77The revaluation model is applied after an asset has been initially recognised at cost. Two adjustments: when only part of the cost has been recognised as an asset because the recognition criteria were met only part of the way through the process (see para. 65), the revaluation model may be applied to the whole asset; it may also be applied to an asset received by way of a government grant and recognised at a nominal amount (see para. 44).
• IAS 38 §78An active market for an intangible asset is uncommon, although it may exist: in some jurisdictions such a market may exist for freely transferable taxi licences, fishing licences or production quotas. However, an active market cannot exist for brands, newspaper mastheads, music and film publishing rights, patents or trademarks, because each such asset is unique. Even when intangible assets are bought and sold, contracts are negotiated individually and transactions are relatively infrequent, so the price paid for one asset may not provide sufficient evidence of the fair value of another, and prices are often not available to the public.
• IAS 38 §80When an asset is revalued, either the gross carrying amount is adjusted in a manner consistent with the revaluation of the carrying amount and the accumulated amortisation is adjusted to equal the difference between the gross carrying amount and the carrying amount (after accumulated impairment losses), or the accumulated amortisation is eliminated against the gross carrying amount; the adjustment forms part of the increase or decrease accounted for in accordance with paras. 85 and 86.
• IAS 38 §81If an asset in a class of revalued assets cannot be revalued because there is no active market, it is carried at cost less any accumulated amortisation and impairment losses.
• IAS 38 §82If the fair value of a revalued asset can no longer be measured by reference to an active market, its carrying amount is its revalued amount at the date of the last revaluation by reference to the active market, less any subsequent accumulated amortisation and impairment losses.
• IAS 38 §87The cumulative revaluation surplus in equity may be transferred directly to retained earnings when it is realised: in full on the retirement or disposal of the asset, or progressively as the asset is used, the amount realised then being the difference between amortisation based on the revalued carrying amount and the amortisation that would have been recognised on the basis of historical cost. The transfer is not made through profit or loss.
• IAS 38 §124For intangible assets accounted for at revalued amounts, the entity discloses: (a) by class, the effective date of the revaluation, the carrying amount of the revalued assets and the carrying amount that would have been recognised under the cost model; (b) the amount of the revaluation surplus relating to intangible assets at the beginning and end of the period, the changes during the period and any restrictions on its distribution to shareholders.
• IAS 38 §125For the disclosures about revalued assets, classes may be aggregated into larger classes, unless aggregation would result in the combination of amounts measured under the cost model and the revaluation model in a single class.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

18 questions

• True or false? In a class of intangible assets measured using the revaluation model, an asset for which there is no active market is carried at its cost less accumulated amortisation and impairment losses.L2
• True or false? An entity may apply the cost model to its class of patents and the revaluation model to its class of transport licences, which are traded on an active market.L2
• An entity adopts the revaluation model for a class of intangible assets. By reference to what is the fair value of these assets determined?L1
• Pescalia, a fishing company, holds a class of fishing quotas, all traded on an active market except one quota for a rare species, which is never traded. Pescalia adopts the revaluation model for this class. How is the rare-species quota measured?L2
• Cerdane group holds two classes of intangible assets: industrial patents, for which there is no active market, and taxi licences, traded on an active market. The CFO wishes to move to the revaluation model for all its intangible assets. Which analysis is correct?L2
• Lactavia, a cooperative, holds a class of milk production quotas, almost all traded on an active market, and a separate class of software. It is considering adopting the revaluation model for its quotas. Which statements are correct? More than one answer may be correct.L2
• Pêcheries Armorine, which applies the cost model to its intangible assets, is considering adopting the revaluation model for its portfolio of transferable fishing licences. What condition must be met for a licence in this portfolio to be revalued?L3
• Agri-Quotas Ouest has opted for the revaluation model for its class of production quotas, most of which are traded on an active market. Which of the following statements are correct?L4
• At 31 December 20X2, Armement Kerdual revalues for the first time a transferable fishing licence acquired for {cost}, whose accumulated amortisation amounts to {accumulated_amortisation}. Its fair value, measured by reference to an active market, is {fair_value}. The entity eliminates the accumulated amortisation against the gross carrying amount of the asset. No decrease in value has previously been recognised. The whole class of fishing licences to which this asset belongs, traded on that active market, is revalued at the same date. Ignore deferred tax effects. Calculate the revaluation surplus recognised in other comprehensive income and the gross carrying amount of the licence after revaluation.L3
• Taxis Solenne applies the revaluation model to its taxi licences, which are traded on an active market. At 30 June 20X3, a licence bought for {cost} shows accumulated amortisation of {accumulated_amortisation}; its fair value at that date reaches {fair_value}. Under its accounting policy, Taxis Solenne restates the gross carrying amount proportionately to the change in carrying amount. This asset has never suffered a decrease. Ignore deferred tax effects. Calculate the revaluation surplus and the accumulated amortisation after revaluation.L3
• Laiterie Brocéliane revalues a milk production quota by reference to an active market. At 31 December 20X1, the quota is revalued to 240,000; it is amortised on a straight-line basis over its remaining useful life of 4 years. During 20X2, trading on that market ceases and no observable price is available at the year-end. No impairment loss is identified. What is the carrying amount of the quota at 31 December 20X2?L3
• Transports Vallerin applies the revaluation model to its class of taxi licences, which are traded on an active market in the large cities where it operates. It has just acquired a licence in a small town where no licences are traded. The finance director proposes revaluing this licence on the basis of a present value of expected takings, calculated by an external firm, in order to keep the class uniform. Write a judgement memo on the measurement of this licence and on the disclosures.L4
• Taxis Bellerive apply the revaluation model for the first time to a taxi licence traded on an active market. This licence, bought for {cost}, is amortised: its accumulated amortisation reaches {accumulated_amortisation}, while the market values it at {fair_value}. Bellerive eliminates the accumulated amortisation against the gross carrying amount. The licence has never suffered a decrease. The whole class of taxi licences to which this asset belongs, traded on that active market, is revalued at the same date. Ignore deferred tax effects. Record the single revaluation entry.L3
• Armement Kerlouan applies the revaluation model for the first time to a transferable individual fishing quota, amortised over its finite useful life. The quota cost {cost} and its accumulated amortisation amounts to {accumulated_amortisation}. The active market values it at {fair_value}. The entity eliminates the accumulated amortisation against the gross carrying amount. The whole class of fishing quotas to which this asset belongs, traded on that active market, is revalued at the same date. Ignore deferred tax effects. Record the revaluation entry.L3
• The management of Halvérac is considering adopting the revaluation model for several intangible assets. Which statements are correct?L3
• After an internal process lasting several months, Pescarel has obtained a freely transferable production quota, traded in an active market. The expenditure incurred before the recognition criteria were met (30,000) was recognised as an expense; only the expenditure incurred afterwards (50,000) forms the cost of the asset. Pescarel applies the revaluation model to this class of assets. At the reporting date, the market price of the quota is 140,000. What may Pescarel do?L3
• Ondaris holds production quotas traded in an active market, acquired for {cost} and amortised on a straight-line basis over {useful_life} years, with no residual value. It applies the revaluation model. After {years_elapsed} years of amortisation, it revalues the quotas at {revalued_amount}; the remaining useful life is unchanged. Under its accounting policy, Ondaris transfers each year to retained earnings the part of the revaluation surplus realised through the use of the asset. For the year following the revaluation, calculate the amortisation based on the revalued amount, the amortisation that would have been based on historical cost and the amount transferred. Deferred tax is ignored.L3
• Taxelis applies the revaluation model to its taxi licences, which are freely transferable and traded in an active market. It sells one of them; at the disposal date, the revaluation surplus in equity relating to this licence amounts to 70,000. Under its accounting policy, Taxelis transfers the whole revaluation surplus when the asset is disposed of. Deferred tax is ignored. How are these 70,000 accounted for?L3