Asset Revaluation and Revaluation Surplus

Asset revaluation is the process of adjusting the carrying amount of certain non-current assets, such as property, plant, and equipment (PPE), to reflect their fair value at the reporting date. Revaluation provides a mechanism for entities to present assets on the balance sheet at amounts that are more relevant and reliable in changing market conditions. This approach can affect both the statement of financial position and equity, as increases in asset value are not recognized through profit or loss but through other comprehensive income.

Revaluation Model vs. Cost Model

Entities may choose between two models for subsequent measurement of eligible non-current assets:

• Cost model: Assets are carried at historical cost less accumulated depreciation and impairment.

• Revaluation model: Assets are carried at fair value at the date of revaluation, less subsequent depreciation and impairment.

The revaluation model is permitted under IFRS (IAS 16 for PPE, IAS 38 for certain intangibles), but not under US GAAP for most asset types.

Scope of Revaluation

The revaluation model can be applied to:

• Classes of property, plant, and equipment (e.g., land, buildings, machinery)

• Some intangible assets with an active market (e.g., licenses, trademarks)

Once chosen, the policy must be applied to an entire asset class, not on a selective, asset-by-asset basis.

Frequency and Basis of Revaluation

Revaluations should be carried out with sufficient regularity to ensure that the carrying amount does not differ materially from fair value at the end of the reporting period. The fair value is determined by reference to market-based evidence, appraisals, or income/cost approaches, depending on the asset type and market activity.

Accounting for Increases in Asset Value

When an asset’s carrying amount is increased as a result of revaluation:

• The increase is credited directly to a revaluation surplus within equity, through other comprehensive income.

• If a previous revaluation decrease was recognized in profit or loss for that asset, the current increase is recognized in profit or loss to the extent it reverses the previous decrease.

Example:

• Carrying amount before revaluation: $800,000

• Revalued amount: $1,000,000

• Revaluation surplus recognized: $200,000 (credited to OCI and revaluation surplus)

Accounting for Decreases in Asset Value

When an asset’s carrying amount is decreased as a result of revaluation:

• The decrease is recognized in profit or loss to the extent it exceeds any credit balance in the revaluation surplus for that asset.

• If a revaluation surplus exists, the decrease is debited to OCI, reducing the surplus.

Depreciation after Revaluation

Depreciation is calculated based on the revalued amount and the revised remaining useful life of the asset. This results in higher depreciation expense in future periods compared to the cost model.

Transfer of Revaluation Surplus

• The revaluation surplus can be transferred directly to retained earnings as the asset is used (e.g., the difference between depreciation based on revalued amount and depreciation based on cost).

• On disposal, the entire surplus related to that asset may be transferred to retained earnings.

No transfer is made through profit or loss.

Disclosure Requirements

Entities must disclose:

• The revaluation methods and significant assumptions used

• The effective date of the revaluation

• Whether an independent valuer was involved

• The carrying amount of each class of revalued assets

• The revaluation surplus, including movements and restrictions on distribution

Relevant Accounting Standards

• IFRS: IAS 16—Property, Plant and Equipment; IAS 38—Intangible Assets

• US GAAP: Does not generally permit asset revaluation except in rare cases (e.g., investment property under certain standards)

Summary Table: Asset Revaluation and Revaluation Surplus

Aspect	Treatment
Increase in value	OCI to revaluation surplus (equity), unless reverses prior loss
Decrease in value	P&L, unless reverses existing revaluation surplus
Depreciation	Based on revalued amount
Disclosure	Required: methods, dates, carrying amounts, surplus

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