Revaluation Model for Property Plant and Equipment and Intangible Assets (IAS 16 and IAS 38)

IAS 16 and IAS 38 allow a policy choice when measuring PP&E or intangible assets subsequently to their initial recognition – cost model or revaluation model (IAS 16.29; IAS 38.72).

Under the revaluation model, an asset is carried at its fair value (i.e. revalued amount) less any accumulated depreciation and any accumulated impairment losses. Revaluations should be made with sufficient regularity to ensure that the carrying amount does not differ materially from fair value at the end of the reporting period (IAS 16.31,34; IAS 38.75). IAS 16 does not require independent valuers to be involved in the process, but such information should be disclosed (IAS 16.77(b)). When an entity switches from cost model to revaluation model, there is no need to apply this change in accounting policy retrospectively (IAS 8.17).

The same measurement model should be applied to an entire class of PP&E/intangible assets (IAS 16.29; IAS 38.72). If an asset is revalued, the entire class to which that asset belongs should be revalued to avoid a mixture of fair values determined at different dates (IAS 16.36,38; IAS 38.73). A class is a grouping of assets of a similar nature and use in an entity’s operations. Paragraph IAS 16.37 gives examples of classes of PP&E.

The effect of increase in carrying amount of an asset as a result of revaluation is included in other comprehensive income (OCI), but the decrease and impairment losses impact P/L. However, increase will be included in P/L to the extent of previous decreases and impairment losses and, similarly, decreases are included in OCI to the extent of previous accumulated increases. The resulting balance of revaluation surplus is accumulated as a separate part of equity under the heading of revaluation surplus (IAS 16.39-40).

The revaluation surplus can be transferred to retained earnings (without P/L impact) along with depreciation charge that is higher due to revaluation or when the related asset is derecognised (IAS 16.41). These transfers are not required but should be done, otherwise the balance of revaluation surplus will be carried forward indefinitely, even though related assets may be long gone.

Revaluation of intangible assets

The revaluation model for intangible assets does not allow the revaluation of intangible assets that have not previously been recognised as assets or the initial recognition of intangible assets at amounts other than cost (IAS 38.76).

IAS 38 however does allow the revaluation model to be applied to intangible assets received by way of a government grant and recognised at a nominal amount. These kinds of intangible assets (e.g. fishing licences, import quotas) may often be the only ones that meet the active market criterion discussed below.

IAS 38 requires that the fair value of an intangible asset should be measured by reference to an active market, i.e. Level 1 in the fair value hierarchy. IAS 38 does not allow to measure fair value using valuation techniques using Level 2 or 3 inputs (see IFRS 13 for more discussion on fair value hierarchy). IAS 38 notes that it is uncommon for an active market to exist for an intangible asset. It further explains that an active market cannot exist for unique intangible assets (e.g. brands) and that contracts for the sale of intangible assets are negotiated between individual buyers and sellers, and transactions are relatively infrequent (IAS 38.78).

Entries at the revaluation date

At the date of revaluation, the carrying amount must equal the fair value. This can be effected in two ways (IAS 16.35):

  1. by adjusting the gross book value of the asset and accumulated depreciation; or
  2. by eliminating accumulated depreciation and adjusting the gross book value of the asset to equal revalued amount.

Example: Entries at revaluation

Entity A has an asset which cost $10 million, has a useful life of 10 years and has been in use for 4 years. Therefore, accumulated depreciation is $4 million (straight line method, no residual value) and net book value is $6 million. This asset is carried at revalued amount and the fair value is estimated at $8 million.

The balances relating to the asset before revaluation are as follows:

PP&E gross book value$10m
PP&E accumulated depreciation$4m

Entity makes the following entries at revaluation date:

Approach #1

PP&E gross book value$2m
PP&E accumulated depreciation$4m
Revaluation reserve (OCI)$2m

Under this approach, the accumulated depreciation is eliminated and the gross book value equals the fair value. The resulting revaluation gain of $2m is recognised in OCI.

Approach #2

PP&E gross book value$3.3
PP&E accumulated depreciation$1.3
Revaluation reserve (OCI)$2m

Under this approach, the gross book value is adjusted upwards proportionately to the relative increase in carrying amount due to revaluation, i.e. by 33%.

More about IAS 16 and 38

See other pages relating to IAS 16 and IAS 38:
IAS 16 Property, Plant and Equipment: Scope, Definitions and Disclosure
IAS 38 Intangible Assets: Scope, Definitions and Disclosure
IAS 16: Cost of Property, Plant and Equipment
IAS 38: Recognition and Cost of Intangible Assets
IAS 16 and IAS 38: Depreciation and Amortisation of Property, Plant and Equipment and Intangible Assets
IAS 16 and IAS 38: Revaluation Model for Property Plant and Equipment and Intangible Assets

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