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

In cost model:-

the fixed assets are carried at their Historical less Accumulated depreciation and Accumulated impairment losses. There is no upward adjustment to valuedue to changing circumstances.

In revaluation model

: an asset is initially recorded at cost but subsequently its carrying amount is increased to account for any appreciation in value.

The difference between cost model and revaluation model :

is that revaluation model

allows both downward and upward adjustment

in value of an asset while cost model allows only downward adjustment due to impairment loss.

1)--With the Cost model,

The asset is carried at cost less accumulated depreciation and impairment. [IAS16.30] whereas under

Revaluation model, the

asset is carried at a revalued amount, being its fair value at the date of revaluation less subsequent depreciation and impairment, provided that fair value can be measured reliably. [IAS16.31].

2)-Under the revaluation model, revaluations should be carried out regularly, so that the carrying amount of an asset does not differ materially from its fair value at the balance sheet date whereas under the cost model it is not so.