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chapter 9.docx

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ACCT 301
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Chapter 9 I have found this note difficult to understand and follow, perhaps due to the difficulty of the terms used to describe this note. But who needs this kind of formality? Simply this note says, okay you’ve revalued your assets in the past, you’ve made some profits, some losses, you may have disposed some of them too, if that is so, suppose that the revaluations did not take place, what would the profit or loss be if they were based on the historical cost figure? We may answer that question by taking the following steps: Step 1 Find out the profit on ordinary activities before taxation. Step 2 a) Calculate the depreciation charges of all assets based on their revaluation figures. b) Then calculate the depreciation charges but based on their original historical cost figure. c) Find the difference between a) and b), and note it down. Step 3 Were there any disposals of F.A that have been previously revalued? (There must be or else, this note wouldn’t be needed in the first place). a) Well, if the answer is yes, we should calculate the profits/losses made on the revalued figure. E.g. the revalued cost of the F.A is 200,000, and the sales proceeds are 300,000. Then the profit would be 100,000. Simple Right?! b) Now we should calculate the profits/losses that would have made if we used the asset’s historical cost figure rather than the revaluation cost. E.g. if the Historical cost of the fixed asset was 100,000 rather than 200,000 (revalued amount), then the profit would be 200,000. Get it?! c) We will now simply calculate their difference; in this case the difference between the two profits is 200 less 100, which are 100,000. Step 4 we now simply add up the figures obtained in step 2c) and 3c) and the profit before tax to obtain the historical cost profit on ordinary activities before taxation. FRS 3, requires that we note down the steps taken from 1 to 4 in a way of note to be disclosed in the financial statements, and this should be done as per the following format: Reconciliation of Profit to Historical Cost Profit For the year ending 31 December 20x3 $’000 Reported profit on ordinary activities before taxation Step 1 Realization of property revaluation gains Step 3 Differences between historical cost
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