Can Land Be Revalued Before Sale to Reduce Impact on Book Profits?

Query

Delta Limited, hereinafter referred to as “the company”, is undertaking a restructuring exercise and is proposing to divest one of its business divisions. In furtherance of this objective, the Company has entered into a cancellable, non-binding memorandum of understanding (MOU) with a potential buyer to explore the sale of the division on a going-concern basis.

As at the reporting date, the business division does not satisfy the criteria prescribed under Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations, for classification as a disposal group held for sale. The division includes one freehold land and one leasehold land, both of which are currently carried at historical cost.

Before finalising its plan to sell the division, the Company is considering revaluing the lands. The Company notes that under Ind AS 16, Property, Plant and Equipment, an increase in the carrying amount of an asset arising on revaluation is recognised in Other Comprehensive Income (OCI) and accumulated in equity as revaluation surplus. Further, Ind AS 16 permits the balance in the revaluation surplus relating to an item of property, plant and equipment to be transferred directly to retained earnings when the asset is derecognised, without routing the transfer through profit or loss.

The Company believes that if the lands are revalued before the sale of the business division, the appreciation in value would be recognised in OCI rather than profit or loss and, consequently, would not form part of book profits at the time of disposal.

Delta Limited seeks guidance on whether the proposed revaluation of land immediately prior to the planned sale of the business division is appropriate under Ind AS.

Relevant Provisions

Para 31 of Ind AS 16

After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period.

Para 36 of Ind AS 16

If an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to which that asset belongs shall be revalued.

Para 39 of Ind AS 16

If an asset’s carrying amount is increased as a result of a revaluation, the increase shall be recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the increase shall be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss.

Para 41 of Ind AS 16

The revaluation surplus included in equity in respect of an item of property, plant and equipment may be transferred directly to retained earnings when the asset is derecognised. This may involve transferring the whole of the surplus when the asset is retired or disposed of.

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