Question

‘Impairment is only relevant to assets carried under the cost model. For assets carried under the revaluation model, such as our land and buildings, increases and decreases in fair value dictate whether carrying amounts are adjusted up or down. We don’t bother testing land and buildings for impairment.’

Required

Critically evaluate the above statement.

Answer 1

Under US GAAP, once an asset is impaired its value cannot be increased regardless of what its fair market value is; once the value of an asset is decreased, it stays at that value unless its market value declines again. US GAAP does require that a business impair its assets if its fair market value decreases.

Under International Financial Reporting Standards, once a fixed asset has been revalued its book value can be adjusted periodically to market value using the cost model or the revaluation model. The cost model records an asset at its historical cost. If an asset becomes impaired and an impairment loss results, the asset can fall under the revaluation model that allows periodic adjustments to the asset’s book value. Future upward revisions to the value of the asset can recover losses from prior years under the revaluation model.

A revaluation that increases or decreases an asset’s value can be accounted for with a journal entry. The asset account is debited (increased) for the increase in value or credited (decreased) for a decrease in value. An increase in the asset’s value should not be reported on the income statement; instead an equity account is credited called “Revaluation Surplus. ” Revaluation surplus is reported in the other comprehensive income sub-section of the owner’s equity section in the balance sheet. The revaluation surplus account accounts for increases in asset value, and it also offsets any downward revisions, such as an impairment loss, in asset value. When the credit balance in the revaluation surplus account zeros out, an impairment loss is reported on the income statement.