Revaluation Model

The revaluation model is an accounting policy under IAS 16 that carries a class of property, plant, and equipment at fair value on the revaluation date, less subsequent accumulated depreciation and impairment losses. It is an alternative to the cost model after initial recognition. It does not permit a company to selectively increase only the assets whose values have risen.

Key Takeaways

• IAS 16 initially measures qualifying property, plant, and equipment at cost.
• After recognition, an entity may elect the revaluation model for an entire class of assets when fair value can be measured reliably.
• The revalued amount is fair value at the revaluation date, not fair value minus depreciation accumulated before that date.
• Revaluations occur often enough to prevent a material difference between carrying amount and current fair value; annual revaluation is not automatically required.
• Revaluation changes future depreciation, equity presentation, ratios, disclosures, and potentially deferred tax.

Cost Model Versus Revaluation Model

The accounting framework must be identified before applying this model. IAS 16 is an IFRS Accounting Standard. Other frameworks may restrict or prohibit upward revaluation or use different presentation and disclosure rules.

How the Revaluation Works

At the revaluation date:

After that date:

IAS 16 permits specified methods for adjusting the gross carrying amount and accumulated depreciation at revaluation. Those mechanics should not be confused with deducting old accumulated depreciation from the newly measured fair value.

The entity also reviews useful life, residual value, and depreciation method under the applicable requirements. A higher carrying amount usually increases future depreciation when the remaining useful life and residual value are unchanged.

Upward and Downward Revaluations

Under IAS 16, an upward revaluation is generally recognized in other comprehensive income and accumulated in equity as a revaluation surplus. An increase is recognized in profit or loss to the extent it reverses a previous decrease for the same asset that was recognized in profit or loss.

A downward revaluation is generally recognized in profit or loss. It is recognized in other comprehensive income to the extent of an existing revaluation surplus for the same asset. These details matter because equal changes in carrying amount can affect earnings and equity differently depending on the asset’s history.

Worked Example

Assume a building has the following amounts immediately before revaluation:

The carrying amount increases by $1,500,000. If there was no prior downward revaluation recognized in profit or loss for this asset, the increase is generally recognized in other comprehensive income and accumulated as revaluation surplus, subject to related tax accounting.

If the building has no residual value and a remaining useful life of 15 years, straight-line depreciation changes as follows:

The revaluation improves neither cash flow nor operating capacity by itself. It changes the accounting carrying amount and later depreciation. Analysts should separate the non-cash remeasurement from operating performance and reconcile its effects on asset turnover, return on assets, equity, and leverage ratios.

Frequency and Class-Level Consistency

The IFRS Foundation’s IAS 16 overview describes the standard’s measurement, depreciation, and impairment principles. The full standard requires revaluation with sufficient regularity. Assets with volatile fair values may need frequent revaluation, while assets with insignificant changes may need it less often.

Applying the policy to an entire class reduces selective remeasurement. Classes might include land, buildings, machinery, ships, aircraft, or motor vehicles, depending on the entity’s asset groupings and applicable requirements.

Common Mistakes

• Subtracting pre-revaluation accumulated depreciation from the new fair value.
• Revaluing one appreciated building while leaving comparable buildings in the same class at stale amounts.
• Assuming every revaluation increase is reported in current profit.
• Calling the revaluation surplus distributable cash or operating income.
• Keeping the old depreciation charge after changing the depreciable carrying amount.
• Treating annual revaluation as mandatory for every asset class.
• Applying IAS 16 treatment without confirming the reporting framework and asset classification.
• Assuming intangible assets can be routinely revalued; IAS 38 permits that model only when an active market exists, which is uncommon for many unique intangibles.

Related Terms

• Historical Cost
• Fair Value
• Depreciation
• Impairment
• Valuation Risk

FAQs

This page is educational and is not accounting, audit, tax, legal, or appraisal advice. Consult the applicable standards and professional advisers for a specific reporting decision.