How is the excess depreciation from a revaluation surplus treated under IAS 16?

Under IAS 16, when an asset is revalued and there is an increase in value leading to a revaluation surplus, any excess depreciation resulting from this revaluation is treated in a specific way. The correct treatment allows for this excess depreciation to be transferred to retained earnings.

This transfer occurs because the surplus reflects a change in the value of the asset rather than ongoing operational performance. By moving this excess from the revaluation surplus to retained earnings, it acknowledges that the excess depreciation does not impact the current operating results and instead adjusts the equity to accurately reflect the changes due to the revaluation.

This helps maintain clarity in the financial statements by separating unrealized gains from realized earnings. It aligns with the overall principle of not recognizing gains until they are realized while allowing for the excess depreciation to affect retained earnings during future periods in which the revaluation surplus is reduced through depreciation charges.

Thus, transferring excess depreciation to retained earnings effectively maintains the integrity of both the profit or loss statement and the balance sheet when reflecting the true financial standing of the organization after revaluations are considered.