The revaluation model gives a business the option of carrying a fixed asset at its revalued amount. Subsequent to the revaluation, the amount carried on the books is the asset’s fair value, less subsequent accumulated depreciation and accumulated impairment losses. Under this approach, one must continue to revalue fixed assets at sufficiently regular intervals to ensure that the carrying amount does not differ materially from the fair value in any period. This option is only available under international financial reporting standards (IFRS).
The fair values of some fixed assets may be quite volatile, necessitating revaluations as frequently as once a year. In most other cases, IFRS considers revaluations once every three to five years to be acceptable.
When a fixed asset is revalued, there are two ways to deal with any depreciation that has accumulated since the last revaluation. The choices are:
- Force the carrying amount of the asset to equal its newly-revalued amount by proportionally restating the amount of the accumulated depreciation; or
- Eliminate the accumulated depreciation against the gross carrying amount of the newly-revalued asset. This method is the simpler of the two alternatives.
Use a market-based appraisal by a qualified valuation specialist to determine the fair value of a fixed asset. If a fixed asset is of such a specialized nature that a market-based fair value cannot be obtained, then use an alternative method to arrive at an estimated fair value. Examples of such methods are using discounted future cash flows or an estimate of the replacement cost of an asset.
If the election is made to use the revaluation model and a revaluation results in an increase in the carrying amount of a fixed asset, recognize the increase in other comprehensive income, and accumulate it in equity in an account entitled “revaluation surplus.” However, if the increase reverses a revaluation decrease for the same asset that had been previously recognized in profit or loss, recognize the revaluation gain in profit or loss to the extent of the previous loss (thereby erasing the loss).
If a revaluation results in a decrease in the carrying amount of a fixed asset, recognize the decrease in profit or loss. However, if there is a credit balance in the revaluation surplus for that asset, recognize the decrease in other comprehensive income to offset the credit balance. The decrease recognized in other comprehensive income decreases the amount of any revaluation surplus already recorded in equity.
If a fixed asset is derecognized, transfer any associated revaluation surplus to retained earnings. The amount of this surplus transferred to retained earnings is the difference between the depreciation based on the original cost of the asset and the depreciation based on the revalued carrying amount of the asset.