Revaluation model (IAS 16)

The revaluation model is a method of accounting for property, plant, and equipment (PPE) under International Accounting Standard (IAS) 16. Under this model, an entity can choose to revalue its PPE to fair value, which is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction.

Key features of the revaluation model include:

1. Revaluations are not required to be done annually, but should be done with sufficient regularity to ensure that the carrying amount of the asset does not differ materially from its fair value.

2. Revaluations should be performed by a qualified independent valuer.

3. Any increase in the value of the asset as a result of the revaluation is recognized in other comprehensive income and accumulated in a revaluation surplus account in equity.

4. Any decrease in the value of the asset is recognized in profit or loss, but to the extent that it reverses a previous revaluation increase for the same asset, it is recognized in other comprehensive income to the extent of the remaining balance in the revaluation surplus account.

5. When an asset is derecognized, any remaining balance in the revaluation surplus account related to that asset is transferred to retained earnings.

Overall, the revaluation model allows entities to reflect changes in the fair value of their PPE in their financial statements, providing a more accurate representation of the value of these assets.

Revaluation Model (IAS 16)

The revaluation model under IAS 16 allows entities to carry property, plant, and equipment (PPE) at a fair value other than the cost or depreciated cost.

Key Features:

- Basis of Valuation: PPE is valued at its current fair value, which is defined as the estimated amount for which the asset could be exchanged in an arm's-length transaction between knowledgeable, willing parties.
- Regular Revaluations: PPE must be revalued regularly, at least every five years.
- Upward and Downward Revaluations: If the property's fair value increases, it is revalued upward and the revaluation surplus is recorded in equity. If the fair value decreases, it is revalued downward and the revaluation deficit is recorded in profit or loss.
- Recognition of Revaluation Gains and Losses: Revaluation gains and losses are recognized in profit or loss when the PPE is sold or disposed of.
- Impairment Testing: PPE must be tested for impairment annually or when there is an indication of impairment. If the carrying amount exceeds recoverable amount, an impairment loss is recognized.

Advantages:

- Reflects Current Value: The revaluation model provides a more accurate representation of the asset's current value on the balance sheet.
- Improved Financial Reporting: It enhances the reliability and transparency of financial statements by providing more relevant information about the asset's valuation.
- Supports Decision-Making: The fair value information can assist management in making informed decisions regarding asset utilization and disposal.

Disadvantages:

- Costly and Time-Consuming: It is more expensive and time-consuming than the cost or depreciated cost model.
- Subjectivity in Valuation: The fair value estimate can be subjective, which may lead to overvaluation or undervaluation.
- Potential for Manipulation: The flexibility allowed in revaluations may present an opportunity for earnings management.

Eligibility:

To be eligible for revaluation, PPE must meet the following criteria:

- It must not be held for sale in the ordinary course of business.
- Its fair value can be reliably measured.
- It is used in the entity's earning activities.

Entities should carefully consider the advantages and disadvantages before adopting the revaluation model for PPE.