Revaluations and Impairment Testing of Non-Current Assets

Running head: REVALUATIONS AND IMPAIRMENT TESTING OF NON-CURRENT
ASSETS
Revaluations and Impairment Testing of Non-Current Assets
Name of the Student
Name of the University
Author’s Note

1REVALUATIONS AND IMPAIRMENT TESTING OF NON-CURRENT ASSETS
Table of Contents
Answer to Question 1.................................................................................................................2
Answer to Question 2.................................................................................................................2
Answer to Question 3.................................................................................................................3
Requirement (a)......................................................................................................................3
Requirement (b).....................................................................................................................3
Requirement (c)......................................................................................................................5
Requirement (d).....................................................................................................................5
References..................................................................................................................................7

2REVALUATIONS AND IMPAIRMENT TESTING OF NON-CURRENT ASSETS
Answer to Question 1
As per the provided scenario, the proposition of one of the board of directors of Simba
Ltd is to introduce Revaluation Model for Fixed Assets. However, before adopting the
proposed revaluation model, it is needed to consider both the advantages and disadvantages
of this method.
Companies use this revaluation model for ascertaining the true value of the assets
owned by them. The implementation of this revaluation model assists the companies in
gaining the fair market value of the fixed assets after major appreciation since the purchased
or acquired price (Choi et al., 2013). This correct revaluation helps the companies in gaining
higher loan amount. At the same time, companies can properly negotiate the price of their
fixed assets at the time of merger and acquisition when they know the fair value of their fixed
assets. Most importantly, revaluation model requires the manual reassessment of the values of
the fixed assets in each period and it does not require estimating the useful lifespan and
residual value for the calculation of depreciation. It decreases the burden of depreciation
calculation from the companies. However, one disadvantage of revaluation model is that it
decreases in net income in case there is decrease in fair value of assets (Nijam, 2018).
As per the above discussion, Simba Ltd can be majorly beneficial in different aspects
from the adoption of revaluation model and there is little disadvantage of this model. Hence,
the board should adopt the director’s proposal to adopt revaluation model for fixed assets.
Answer to Question 2
The main objective of impairment testing is to make it sure that a firm is not carrying
the assets at an amount that surpasses their recoverable value. At the same time, asset
revaluation model leads to the increase and decrease in the carrying amount of the assets due
to the change in fair value (Hu, Percy & Yao, 2015).
Fair value and recoverable value is not same in spite of a connection between them.
The recoverable amount of a revalued assets exposes the firm to the risk that the fair value of
that asset can surpass its recoverable amount. This can take place whenever the recoverable
value of an asset is obtained from deducting the cost of disposal from fair value. There will
be overstatement of the carrying amount of an asset by the amount of disposal cost in case the
asset is revaluated to the fair value (Baek & Lee, 2016).