Please can any finance/accounting bods help? Distributable profits question!

[smthngStupid]

Currently studying for my FAR ACA exam and have a question about distributable profits:

"If fixed assets are revalued and, as a result, depreciation increases, the additional depreciation may be treated as part of the realised profit for dividend purposes"

How/why is this please? Surely depreciation is an expense and would serve to reduce profits if realised? Or, if unrealised, would make no difference? It's got me stumped...

It would form part of the realised profit but as it's an expense it would reduce said profit.

Thanks, that's what I thought - but in a sample ICAEW question I did, it was implied that the profit was increased due to the depreciation increase?

Have attached here - huge thanks in advance\1

As you can see, in the answer they have added on the additional depreciation, thus increasing the profit. I am really stumped!

It's because IAS 16 permits a transfer from the reval reserve to the P&L reserve to "cover" additional depreciation arising in this way (clue in question!). I assume in the question, the additional £25k has already been debited to the P&L, so is included in the £2m. Therefore the transfer (which credits the P&L) just reverses this.

I'd look in my study manual for where it's covered, but I didn't sit FAR. Too long ago!

FWIW I think the quoted wording in your OP is very confusing, so it's not just you :) Good luck!

That's an excellent explanation, thanks so much! So essentially this transfer/credit to the p&l is the other side of the double entry - one side had already been done?

A separate double entry - the first one is for the additional depreciation so Dr P&L Cr PPE, then the special transfer would be Dr reval reserve Cr P&L reserve.