Questions:
ABC Co purchased an item of property, plant, and equipment for $10 million on January 1st 2020. The useful economic life was estimated to be five years. 

On December 31st 2020, the asset was revalued to $12 million. 

Explain, with suitable calculations, how the above transactions should be dealt with in the financial statements.

Then, on December 31st 2021, the asset's value had fallen to $4 million. The downward revaluation was recorded in other comprehensive income.

How the above transactions should be dealt with in the financial statements for the year ending December 31st, 2021?

Reference answers:
IAS 16 Property, Plant, and Equipment state that revaluation gains on property, plant, and equipment are recorded in other comprehensive income (OCI) and held in a revaluation reserve in equity (other components of equity). Revaluation losses are charged to OCI to the extent that a revaluation reserve exists for that specific asset. Any revaluation loss in excess of the balance on the revaluation reserve is charged to profit or loss.

There was a revaluation gain of $4 million the difference between the carrying amount of $8 million ($10m x 4/5) and the fair value of $12 million. This revaluation gain would have been recognized in other comprehensive income and held in a revaluation surplus in equity.

On December 31st, 2021, the carrying amount of the asset before the revaluation was $9 million ($12 million × 3/4).
The revaluation loss is $5 million ($9m - $4m). Of this, $4 million should be charged to other comprehensive income because that is the balance in the revaluation reserve. The remaining loss of $1 million should be charged against profit or loss. The profits are currently overstated by $1 million.