Chartered Professional Accountant (CPA) Core 1 Practice Exam

Under the revaluation model, when the fair value of PPE increases, how is the gain recognized?

Gain recognized first to net income up to amount of previous losses; Remaining amount to OCI Entire gain to OCI Not recognized until disposal Gain recognized in some other way

Correct Answer:

Gain recognized first to net income up to amount of previous losses; Remaining amount to OCI

Explanation:

Under the revaluation model for PPE, when fair value rises, the gain is handled by offsetting any prior downward movements that hit profit or loss first. If the asset had previously experienced a decrease in value that reduced net income, the upward revaluation is recognized in net income to the extent of those prior losses. Any remaining portion of the increase is then recorded in equity as a revaluation surplus (OCI). If there were no previous decreases to reverse, the entire gain goes to OCI. This mechanism is why recognizing the gain first in net income up to the amount of previous losses, with the remainder going to OCI, is the correct treatment.

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