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Downward Revaluation After a Previous Gain — IAS 16 Worked Example | CALC SERIES #12

When a previously revalued asset falls in value, IAS 16 requires the revaluation surplus to be absorbed first before any loss hits profit or loss. Here's the full worked example — €80k surplus absorbed, €40k to P&L — with journal entries and the OCI reversal.

Explained by Maya, your IFRS Tutor presenter · Calc Series

Downward Revaluation After a Previous Gain — IAS 16 Worked Example | CALC SERIES #12

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In this video

  1. 0:00 Introduction — why sequencing matters on a downward revaluation
  2. 0:22 The scenario — land cost €300k, upward revaluation +€80k (OCI), now FV €260k
  3. 0:55 IAS 16 para 40 — decrease first absorbs revaluation surplus in OCI
  4. 1:20 Total decrease: €380k to €260k = €120k
  5. 1:48 Step 1: absorb €80k surplus — Dr Revaluation surplus €80k (OCI reversal)
  6. 2:15 Step 2: remaining €40k — Dr Impairment loss (P&L) €40k
  7. 2:45 Full journal entry for the downward revaluation
  8. 3:10 Common mistake — sending the full €120k to P&L
  9. 3:40 Recap — surplus first, then P&L

Key terms in plain English

Revaluation surplus
The cumulative gain recognised in other comprehensive income from previous upward revaluations of the same asset. It is held in the revaluation reserve within equity.
OCI reversal
When a previously revalued asset decreases in value, the decrease is first charged against the revaluation surplus through other comprehensive income — reversing the earlier gain — before any excess is recognised in profit or loss.
Downward revaluation
A reduction in the carrying amount of a revalued asset to its fair value. Under IAS 16 para 40, the decrease is charged to OCI to the extent of the existing surplus for that asset, with any excess charged to profit or loss.

Full explanation

IAS 16 para 40 — the sequencing rule for downward revaluations

When a revalued asset decreases in value, IAS 16 paragraph 40 sets out a specific sequence. The decrease is first recognised against any existing revaluation surplus for that asset in other comprehensive income. The surplus was previously recognised in OCI on the upward revaluation, so it is appropriate for the downward movement to reverse through OCI first. Only if the decrease exceeds the existing surplus is any excess recognised as a loss in profit or loss.

The scenario: land revalued up €80k, then down €120k

Year 1: Land purchased at €300,000. Revaluation to €380,000. Entry: Dr Land €80,000 / Cr Revaluation surplus (OCI) €80,000. Surplus in equity: €80,000.

Year 3: Fair value falls to €260,000. Total decrease from the current carrying amount of €380,000: €120,000. The existing surplus is €80,000. The surplus can absorb the first €80,000. The remaining €40,000 must go to profit or loss.

Journal entry for the downward revaluation

Dr Revaluation surplus (equity) €80,000 — reverses the OCI surplus.
Dr Revaluation loss (P&L) €40,000 — the excess above the surplus.
Cr Land €120,000 — reduces the carrying amount from €380,000 to €260,000.

Common mistake: sending the full decrease to P&L

The error: Dr Impairment loss (P&L) €120,000 / Cr Land €120,000. This ignores the existing surplus and overstates the P&L loss by €80,000. The revaluation surplus in equity would remain at €80,000 rather than being cleared, which also misrepresents the equity position. The surplus exists precisely to absorb future downward movements in the same asset — using it correctly is the whole point of the OCI mechanism.

What happens if the asset is subsequently revalued up again?

If the land later rises from €260,000 to, say, €280,000, the €20,000 increase reverses the previous P&L charge first — it goes to profit or loss as a gain up to the €40,000 previously expensed. Only once the P&L loss has been fully recovered does any further increase go to OCI as a new revaluation surplus. The sequence mirrors the downward rule in reverse.