The previous topic handled the adjustments any business meets. The compulsory question at this level also includes the items that need a standard to answer: a building revalued at the year end, equipment sold during the year with the proceeds credited to revenue, a plant being sold, investment property at fair value, a deferred tax balance to be adjusted, and an over provision of last year’s tax.
Each is easy once its rule is known, but together they fill the page and every one needs a correct double entry. This topic works through them in the order that exam questions raise them, and shows how each flows into the statement of profit or loss, other comprehensive income and the statement of financial position. The next topic starts the statement of cash flows.
These items appear in the compulsory question in most diets. May Diet, 2023, Question 1 included an equipment disposal whose proceeds were in revenue, a self-constructed asset in cost of sales, equity investments with an impairment loss, redeemable loan notes at an effective rate and a deferred tax adjustment.
November Diet, 2024, Question 1 included land and buildings revalued, investment property at fair value, a leased plant and a deferred tax balance set to a stated figure. Read technique and adjustments first.
In 30 seconds
Revalued property: depreciate to the revaluation date first, then revalue; the surplus goes to other comprehensive income with deferred tax on it; later depreciation is on the new amount. Disposals: remove the cost and accumulated depreciation, take the profit or loss to profit or loss, and take sale proceeds out of revenue. Self-constructed assets charged to cost of sales are capitalised.
Held for sale: lower of carrying amount and fair value less costs to sell, no depreciation, shown separately. Investment property at fair value: the change goes to profit or loss. Deferred tax: adjust to the required balance, with the movement to profit or loss, and the part for a revaluation to other comprehensive income. An over provision of last year’s tax reduces this year’s tax expense.
Revalued property
Depreciate the building for the year first, then revalue at the year end, so the surplus is measured against the carrying amount after depreciation. The surplus is recognised in other comprehensive income and credited to the revaluation surplus in equity. Land is revalued without depreciation. Deferred tax is provided on the surplus, debited to other comprehensive income.
Depreciation for the next year is on the revalued amount over the remaining life.
For example, a building cost ₦300 million with a 20-year life and accumulated depreciation of ₦60 million at 1 January. Depreciation for the year is ₦15 million, giving a carrying amount of ₦225 million. At the year end it is revalued at ₦270 million, a surplus of ₦45 million. Land that cost ₦100 million is revalued at ₦130 million, a surplus of ₦30 million. The total surplus is ₦75 million.
Deferred tax at 30% is ₦22.5 million, so other comprehensive income is ₦75m − ₦22.5m = ₦52.5 million. Next year’s depreciation is ₦270m ÷ 15 years remaining = ₦18 million.
Disposals and self-constructed assets
- Disposal. Remove the asset at cost and its accumulated depreciation. The profit or loss on disposal is the proceeds less the carrying amount. If the proceeds were credited to revenue, reduce revenue by the proceeds and show the profit or loss as other income or expense. Equipment that cost ₦80 million, with accumulated depreciation of ₦50 million, sold for ₦36 million, has a carrying amount of ₦30 million and a profit of ₦6 million. Revenue is reduced by ₦36 million. Depreciation is charged only up to the date of disposal, or as the question instructs.
- An asset built by the entity. If the cost of making an asset for its own use was recorded in cost of sales, remove it from cost of sales and add it to property, plant and equipment. Depreciation then starts when the asset is available for use.
- Proceeds recorded before use. Under the rule on proceeds before intended use, amounts earned from selling items produced while testing an asset are recognised in profit or loss with the related cost, and are not deducted from the cost of the asset.
Assets held for sale and investment property
An asset that meets the criteria for held for sale is measured at the lower of its carrying amount and fair value less costs to sell, is not depreciated after classification and is presented separately as a current asset.
A plant with a carrying amount of ₦40 million and a fair value of ₦32 million, with costs to sell of ₦2 million, is written down to ₦32m − ₦2m = ₦30 million, an impairment loss of ₦10 million in profit or loss.
Investment property under the fair value model is not depreciated. The change in fair value goes to profit or loss: an increase from ₦120 million to ₦135 million is a gain of ₦15 million, and rental income is shown separately. Under the cost model it is depreciated like other property.
Tax: deferred tax and over provision
The tax charge has up to three parts: current tax for the year, the adjustment for an over or under provision of last year’s tax, and the movement on deferred tax. A deferred tax balance is adjusted to the required closing figure: if the provision was ₦18 million and the closing requirement is ₦26 million, ₦8 million is charged to profit or loss.
The part of the closing balance that arises on a revaluation is charged to other comprehensive income, not profit or loss. An over provision of the previous year reduces this year’s tax expense, and an under provision increases it. The current tax liability at the year end is only the current tax for this year.
For example, current tax is ₦40 million, last year was over provided by ₦6 million, the opening deferred tax is ₦30 million and the closing requirement is ₦33 million before the revaluation and ₦57 million after it, including ₦24 million on the revaluation. The movement of ₦27 million is ₦24m to other comprehensive income and ₦3m to profit or loss. The tax expense in profit or loss is ₦40m − ₦6m + ₦3m = ₦37 million.
Other adjustments that appear
- Financial assets at fair value through profit or loss. The fair value change, including an impairment loss, goes to profit or loss.
- Redeemable loan notes at an effective rate. Finance cost is the opening liability × effective rate, for the period outstanding. The carrying amount rises by the finance cost less interest paid (see the topic on financial liabilities).
- Leased assets. A right-of-use asset and a lease liability are recognised, with depreciation and interest, and the liability split between current and non-current.
- Provisions. A warranty provision is adjusted to the best estimate, and the increase is an expense.
- Dividends and share issues. As in the previous topic.
The ideas in more depth
Why revalue after depreciating
The revaluation compares fair value with what the asset is carried at today. If depreciation for the year were left out first, the surplus would include value that has been used up during the year and charged to profit.
Why sale proceeds are not revenue
Revenue is the income from the entity’s ordinary activities. Selling a machine is not one of them, so only the profit or loss on the disposal is shown, normally in other income or expenses.
Sources and references
- International Accounting Standard (IAS) 16 Property, Plant and Equipment; IAS 40 Investment Property; International Financial Reporting Standard (IFRS) 5 Non-current Assets Held for Sale and Discontinued Operations; IAS 12 Income Taxes; IFRS 9 Financial Instruments and IFRS 16 Leases for the related items.
These points are stated as at 5 November 2026.
Worked examples
Example 1: a revaluation. Building: cost ₦300m, 20-year life, accumulated depreciation ₦60m at 1 January; revalued at the year end to ₦270m. Land: cost ₦100m, revalued to ₦130m. Tax 30%. Required: the surplus and other comprehensive income.
- Depreciation.
₦300m ÷ 20 = ₦15m
carrying amount ₦300m − ₦60m − ₦15m = ₦225m. - Surplus.
Building ₦270m − ₦225m = ₦45m; land ₦30m; total ₦75m. - Other comprehensive income.
₦75m − deferred tax ₦22.5m = ₦52.5m.
Example 2: disposal and held for sale. Equipment (cost ₦80m, accumulated depreciation ₦50m) was sold for ₦36m credited to revenue. A plant (carrying amount ₦40m) is held for sale with fair value ₦32m and costs to sell ₦2m. Required: the effects.
- Disposal.
Profit ₦36m − ₦30m = ₦6m; reduce revenue by ₦36m. - Held for sale.
₦40m − (₦32m − ₦2m) = ₦10m loss; shown at ₦30m as a current asset.
Example 3: the tax charge. Current tax ₦40m; last year over provided by ₦6m; deferred tax opening ₦30m, closing ₦57m of which ₦24m relates to a revaluation. Required: the tax expense.
- Deferred tax to profit or loss.
(₦57m − ₦30m) − ₦24m = ₦3m. - Tax expense.
₦40m − ₦6m + ₦3m = ₦37m.
How to answer in the exam
- List every adjustment and its destination (profit or loss, other comprehensive income, statement of financial position) before writing.
- Do revaluation in two steps: depreciation, then surplus.
- Adjust revenue for any proceeds recorded there.
- Keep the tax parts separate so deferred tax on a revaluation goes to other comprehensive income.
Common mistakes in the exam
- Revaluing before charging the year’s depreciation.
- Leaving sale proceeds in revenue.
- Depreciating an asset held for sale.
- Taking a fair value change on investment property to other comprehensive income.
- Putting all the deferred tax movement in profit or loss.
- Ignoring the over provision of last year’s tax.
Quick revision
- Revalue: depreciate first; surplus to other comprehensive income less deferred tax.
- Disposal: profit or loss on disposal; take proceeds out of revenue.
- Held for sale: lower of carrying amount and fair value less costs to sell; no depreciation.
- Investment property at fair value: gain or loss in profit or loss.
- Tax: current tax, prior-year over or under provision, deferred tax movement.
Practice questions
These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.
Recall check: multiple choice
Question 1. A revaluation surplus on land and buildings is recognised in:
- Profit or loss
- Revenue
- Other comprehensive income
- Cost of sales
Show the answer
C. And accumulated in the revaluation surplus in equity.
Question 2. When revaluing a building at the year end, the entity:
- Depreciates for the year first and then revalues
- Revalues first
- Does not depreciate
- Revalues only land
Show the answer
A. The surplus is measured against the carrying amount after depreciation.
Question 3. An asset held for sale is measured at:
- Cost
- The lower of carrying amount and fair value less costs to sell
- Fair value only
- The higher of the two
Show the answer
B. Any write-down is in profit or loss.
Question 4. An asset held for sale is:
- Depreciated normally
- Shown as non-current
- Revalued each month
- Not depreciated and presented separately
Show the answer
D. It is presented as a current asset.
Question 5. Proceeds from selling equipment that were credited to revenue are:
- Left in revenue
- Credited to equity
- Removed from revenue and the profit or loss on disposal recognised
- Added to inventory
Show the answer
C. The profit or loss is carrying amount against proceeds.
Question 6. The change in fair value of investment property under the fair value model is recognised in:
- Profit or loss
- Other comprehensive income
- Equity directly
- Revenue
Show the answer
A. It is not depreciated.
Question 7. Deferred tax on a revaluation surplus is:
- Ignored
- Charged to profit or loss
- Added to revenue
- Charged to other comprehensive income
Show the answer
D. It follows the item to which it relates.
Question 8. The cost of an asset made by the entity for its own use that was charged to cost of sales is:
- Left in cost of sales
- Capitalised, removing it from cost of sales
- Written off
- Credited to revenue
Show the answer
B. Depreciation begins when it is available for use.
Question 9. An over provision of the previous year’s tax:
- Increases this year’s tax expense
- Is ignored
- Reduces this year’s tax expense
- Restates last year
Show the answer
C. It is a change in estimate.
Question 10. Finance cost on redeemable loan notes is:
- The opening carrying amount multiplied by the effective rate
- The coupon only
- The cash paid
- Nil
Show the answer
A. The carrying amount rises by finance cost less interest paid.
Section B style: written questions
Question 11 (10 marks). (a) State how a revaluation of a building is accounted for, including the tax. (5 marks) (b) State how an asset held for sale is measured and presented. (5 marks)
Question 12 (15 marks). (a) A plant has a carrying amount of ₦55m, a fair value of ₦44m and costs to sell of ₦3m, and is held for sale. Calculate the write-down. (5 marks) (b) A machine cost ₦120m with accumulated depreciation of ₦84m was sold for ₦30m, credited to revenue. Calculate the profit or loss and the adjustment to revenue. (5 marks) (c) Land was revalued from ₦80m to ₦110m. Tax is 30%.
Calculate the surplus, the deferred tax and other comprehensive income. (5 marks)
A further written question
Question 13 (20 marks). A building cost ₦400m, has a 20-year life and accumulated depreciation of ₦80m at 1 January, and is revalued at the year end to ₦380m. Investment property rose from ₦90m to ₦104m. Equipment that cost ₦60m with accumulated depreciation of ₦45m was sold for ₦20m, credited to revenue.
Current tax is ₦40m, last year was over provided by ₦6m, deferred tax was ₦30m at 1 January and is required at ₦33m before the revaluation. Tax is 30%.
(a) Calculate the revaluation surplus, deferred tax and other comprehensive income. (6 marks)
(b) Calculate the gain on investment property and the profit on disposal, and the adjustment to revenue. (6 marks)
(c) Calculate the tax expense in profit or loss. (4 marks)
(d) State where each of the items above appears in the financial statements. (4 marks)
Model answers
Show the model answer to Question 11
(a) Depreciate the building for the year and then revalue (1.5). The surplus is recognised in other comprehensive income and credited to the revaluation surplus (1.5). Deferred tax is provided on the surplus and charged to other comprehensive income (1). Later depreciation is on the revalued amount over the remaining life (1).
(b) It is measured at the lower of carrying amount and fair value less costs to sell (2). A write-down is an impairment loss in profit or loss (1). It is not depreciated (1) and is presented separately as a current asset (1).
Show the model answer to Question 12
(a)
- Fair value less costs to sell ₦44m − ₦3m = ₦41m (2).
- Write-down ₦55m − ₦41m = ₦14m (3).
(b)
- Carrying amount ₦120m − ₦84m = ₦36m (1).
- Loss ₦30m − ₦36m = ₦6m (2).
- Revenue is reduced by the ₦30m proceeds (2).
(c)
- Surplus ₦110m − ₦80m = ₦30m (2).
- Deferred tax 30% × ₦30m = ₦9m (1.5).
- Other comprehensive income ₦30m − ₦9m = ₦21m (1.5).
Show the model answer to Question 13
(a)
- Depreciation ₦400m ÷ 20 = ₦20m
- carrying amount ₦400m − ₦80m − ₦20m = ₦300m (2).
- Surplus ₦380m − ₦300m = ₦80m (1.5).
- Deferred tax 30% = ₦24m (1.5).
- Other comprehensive income ₦56m (1).
(b)
- Investment property gain ₦104m − ₦90m = ₦14m (2).
- Carrying amount of equipment ₦60m − ₦45m = ₦15m
- profit ₦20m − ₦15m = ₦5m (2).
- Revenue is reduced by ₦20m (2).
(c)
- Closing deferred tax ₦33m + ₦24m = ₦57m
- movement ₦57m − ₦30m = ₦27m (1.5), of which ₦24m to other comprehensive income and ₦3m to profit or loss (1).
- Tax expense ₦40m − ₦6m + ₦3m = ₦37m (1.5).
(d) The surplus and its deferred tax are in other comprehensive income and the revaluation surplus (1). The investment property gain and the profit on disposal are in profit or loss (1). The tax expense is in profit or loss and the deferred tax liability is non-current (1). Revenue is reduced by the proceeds (1).
Pathfinder on Company financial statements from a trial balance (ii): revaluation, tax, share issues and held-for-sale items
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
The compulsory question includes an equipment disposal with the proceeds in revenue, the cost of a new office equipment in cost of sales, equity instruments with an impairment loss, redeemable loan notes at an effective rate, and an adjustment to the deferred tax balance.
Revise first: Disposals and self-constructed assets
The compulsory question includes land and buildings revalued, investment property at fair value, a leased plant, and deferred tax adjusted to a stated balance.
Revise first: Revalued property
The question includes a revalued asset, investment property moved to a lower fair value, a plant held for sale written down to fair value less costs to sell, and deferred tax.
Revise first: Assets held for sale and investment property
The compulsory question includes land and buildings under the revaluation model, investment properties at fair value, a warranty provision, equities with an election for other comprehensive income, and a disposal.
Revise first: Tax: deferred tax and over provision
Source: ICAN Pathfinder, Financial Reporting. Diets covered: Every diet in the Pathfinder, from November Diet, 2021 to May Diet, 2026, was reviewed here. The compulsory question in each diet includes these items..
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