Cost model vs revaluation model
After initial recognition, IAS 16 Property, Plant and Equipment lets an entity choose one of two accounting policies for each class of assets:
| Model | Carrying amount |
|---|---|
| Cost model | Cost less accumulated depreciation and accumulated impairment losses |
| Revaluation model | Fair value at the revaluation date, less subsequent accumulated depreciation and impairment losses — available only where fair value can be measured reliably |
Which standard applies?
| Where | Property, plant & equipment | Fair value measurement |
|---|---|---|
| International | IAS 16 | IFRS 13 |
| Australia | AASB 116 | AASB 13 |
| New Zealand (for-profit) | NZ IAS 16 | NZ IFRS 13 |
| New Zealand public benefit entities | PBE IPSAS 17 | — |
| International public sector | IPSAS 45 | — |
Revalue the whole class
If one item is revalued, the entire class it belongs to must be revalued, so the financial statements don’t mix costs and values from different dates. Examples of separate classes include land, land and buildings, machinery, ships, aircraft, motor vehicles, furniture and fixtures, and office equipment. A class can be revalued on a rolling basis only if the revaluation is completed within a short period and kept up to date.
How often should assets be revalued?
IAS 16 requires revaluations to be made regularly enough that the carrying amount does not differ materially from fair value at the reporting date. In practice:
- Assets with significant and volatile changes in fair value may need revaluing every year.
- Assets with only insignificant changes may need revaluing only every three or five years.
- Public sector entities often follow a set cycle under their own sector requirements — check yours.
Recording the result
- An increase goes to other comprehensive income and accumulates in equity as a revaluation surplus — unless it reverses a decrease previously recognised in profit or loss.
- A decrease goes to profit or loss — unless there is a revaluation surplus for the same asset, in which case it reduces that surplus first.
- Accumulated depreciation is either restated in proportion to the change in gross carrying amount, or eliminated against the gross carrying amount.
- The surplus may be transferred to retained earnings as the asset is used or when it is derecognised — never through profit or loss.
Worked example
A class of machinery cost $1,000,000 and has accumulated depreciation of $400,000, a carrying amount of $600,000. A valuation puts its fair value at $750,000. Using the elimination method, and ignoring tax:
| Entry | Debit | Credit |
|---|---|---|
| Eliminate accumulated depreciation | Accumulated depreciation $400,000 | Machinery $400,000 |
| Revalue to fair value | Machinery $150,000 | Revaluation surplus (OCI) $150,000 |
The machinery is now carried at $750,000, and future depreciation is based on that amount over the remaining useful life.
Measuring fair value
Fair value is measured under IFRS 13 (AASB 13 in Australia): the price that would be received to sell the asset in an orderly transaction between market participants at the measurement date, considering its highest and best use. Valuers use the market, cost or income approach. Specialised plant and infrastructure with few sales is often valued at current replacement cost — see our guide to depreciated replacement cost.
What your valuer needs from you
- The purpose, valuation date and the classes to be revalued
- Your asset register and the previous valuation report
- Your capitalisation threshold and how you record components
- Access to the assets for inspection
- Drawings, contracts or maintenance records where relevant