Production is a success: The production begins just a few days after the acquisition and the demand and price acceptance is very good. Two years later several new products have been introduced and the profit for the first year is £200,000 and the second year £280,000. Management become more aware that acquiring new machines would cost near to ten times the price. They appoint professional valuers to carry out a detailed valuation. Their report as at 30 June 2015 indicates a valuation of £135,000 for the machines, a future useful life 10 years and a residual value of £20,000 .
Fair value policy:
Under IAS 16 paragraph 31 the company chooses the "Revaluation Model" in which all members of this class of plant and equipment shall be carried at fair value at the date of valuation less any subsequent accumulated depreciation and impairment losses.
Asset revaluation: Management decide to incorporate the new valuation, useful life and residual value estimations into their books as at 30 June 2015.
Overseas competition: During 2017 management perceive that they had the good fortune of being in at the beginning of a boom market in vintage household goods and that a number of overseas players were increasing their market share. Several domestic manufacturers were changing activity and putting their machinery up for sale. As at 31st December 2017a new valuation report gives a fair of £42,000.
Objective: To show how the asset will be accounted for under IAS 16 and IAS 36 in the company's year-end accounts from 31st Dec 2012 to 31st Dec 2020.