Question

You will examine IFRS revaluation of assets to fair value for financial reporting.

Post a 250 word response to the following Discussion on possible reasons the overwhelming majority of companies fail to use the asset revaluation option.

Please provide a substantial summary for this response.

Answer 1

The revaluation model is an alternative to the cost model and is used for the periodic valuation and reporting of long-lived assets.

Whereas IFRS permits the use of either the revaluation model or the cost model, the revaluation model is not allowed under US GAAP.

Under the revaluation model, the carrying amounts are the fair values at the date of revaluation less any subsequent accumulated depreciation or amortization. The model creates the possibility for the values of long-lived assets to increase to amounts that are greater than their historical costs.

The revaluation model may only be used if the fair value of the assets can be reliably measured. As a result, it can be used for classes of intangible assets only if an active market for the assets exists. It is rarely used for either tangible or intangible assets, but more so for intangible assets.

Whether an asset revaluation affects earnings depends on whether the revaluation initially increases or decreases an asset class’ carrying amount. If the carrying amount of the asset class is initially decreased, the decrease is recognized in profit or loss on the income statement. Subsequently, if the carrying amount of the asset class increases, the increase is recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset class that was previously recognized in profit or loss. An increase in excess of the reversal amount will not be recognized in the income statement but instead will be directly recorded to equity in a revaluation surplus account. An upward revaluation will be treated the same as the amount which is in excess of the reversal amount.

When an asset is retired or disposed of, any related revaluation surplus which is included in equity will be transferred directly to retained earnings.