The revaluation model : is a procedure used for the subsequent measurement of a property plant and equipment, or intangible assets.
Summary revaluation model
IAS 16 incorporates two subsequent measurement models of a property, plant, and equipment, the cost model and the revaluation model.
The revaluation model considers fair value to show the increases and decreases in the value of an asset.
In the cost model, an entity must recognize a fixed asset’s decrease as an impairment.
In the revaluation model, increases or decreases in the value of an asset will be recognized under paragraphs 39 and 40 of IAS 16.
Increases in the fair value of an asset will be recognized in equity in the revaluation model.
In the cost model, an asset does not present valuations; it can only recover its value when it has impairment.
The revaluation model presents two procedures established in paragraph 35 of IAS 16
In this post, I am going to show you an explanation and a practical example of the revaluation model established in IAS 16.
This model aims to show the increase or decrease in the fair value of this type of asset.
IAS 16, set out that an entity can apply the revaluation model or the cost model as an accounting policy.
For one, the cost model don’t consider changes in the fair value of an asset, unlike the revaluation model.
It is important to say that the use of each model must be carried out respecting the class of assets.
This means that an entity can’t apply the cost model and the revaluation model for the subsequent measurement of its buildings, for example, since this would not represent uniformity in applying accounting policies.
Paragraph 35 of IAS 16, presents two procedures to show the effect of the increase in the fair value of a property plant and equipment or intangibles.
Each procedure is explained below:
The first procedure is based on proportionally adjusting the cost of the asset and its accumulated depreciation to show the increase or decrease in the market value of an asset.
Let’s look at the following example
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Revaluation model example
A company, in year one, buys a building for 4,000,000 with a useful life of 60 years.
The entity uses the revaluation model for the subsequent measurement of the asset.
At the end of the reporting period, the fair value of the property is 5,000,000.
To calculate the revaluation, it’s necessary to compare the carrying amount at the measurement date against its fair value.
The difference between the two bases, must be recognized in other comprehensive income in equity.
To adjust the asset and the accumulated depreciation proportionally, as established in number a, of paragraph 35, it is necessary to obtain the proportion of the carrying amount of the asset at the end of the period, compared to its fair value.
This gives a index of 1.3.
With this index, we must adjust the asset’s cost and its accumulated depreciation.
So the adjusted cost of the asset amounts to 5,084,746.
In the same way, we proceed with depreciation.
This operation, results in a balance in accumulated depreciation of 84,746.
To verify that this operation is correctly carried out, the new cost of the asset less the accumulated depreciation, must be equal to the asset’s fair value at the end of the reporting period.
Now, we will proceed to review how the accounting entries will be.
First, the entity needs to adjust the cost of the asset by 1,084,746, and the depreciation in 18,079.
To verify that the accounting adjustments are correctly made, the difference between these two values, must equal the calculated revaluation of 1,066,667.
Revaluation model procedura B
Now we review the other procedure established in the same paragraph, but numeral B.
In this procedure, the accumulated depreciation of the asset, must be eliminated, and it will also be necessary to adjust the cost of the asset to equal it to fair value.
To analyze this procedure, we will use the previous example.
That is, an asset with a cost of 4,000,000, a useful life of 60 years, and a fair value of 5,000,000 at the end of the reporting period.
As we did previously, it will be necessary to calculate the revaluation at the end of the period.
This operation also results in an adjustment to the other comprehensive income account for 1,066,667.
The difference is that in this procedure, we must eliminate the accumulated depreciation to date in 66,667, and in addition, it will be necessary to adjust the asset by 1,000,000 to equalize it at fair value.
As we can analyze in both procedures, the value recognized in the other comprehensive income account is the same.