How does the revaluation model under IAS 16 work for property, plant, and equipment?

Question

AcadiFi · Accepted Answer

The revaluation model is an IFRS-only option (IAS 16) that allows PP&E to be carried at fair value instead of historical cost. US GAAP only permits the cost model. This is a commonly tested IFRS/GAAP difference.

```mermaid
flowchart TD
    A["Revalue PP&E to Fair Value"] --> B{"Fair value vs.
carrying amount?"}
    B -->|FV > Carrying Amount| C{"Previous
impairment?"}
    C -->|Yes| D["Reverse impairment → P&L
(up to original loss)"]
    C -->|No| E["Gain → OCI
(Revaluation Surplus)"]
    D --> F["Any excess → OCI"]
    B -->|FV < Carrying Amount| G{"Existing
revaluation surplus?"}
    G -->|Yes| H["Reduce surplus in OCI
(up to existing balance)"]
    G -->|No| I["Loss → P&L
(Impairment)"]
    H --> J["Any excess loss → P&L"]
```

**Worked Example:**

Silverleaf Properties owns a warehouse purchased for $2,000,000 with accumulated depreciation of $400,000. Carrying amount = $1,600,000.

**Scenario 1 — Revaluation upward to $1,900,000:**
- Gain = $1,900,000 - $1,600,000 = $300,000
- No previous impairment exists
- Entry: Dr. Warehouse $300,000 / Cr. Revaluation Surplus (OCI/Equity) $300,000
- The $300,000 goes to **other comprehensive income**, not profit or loss

**Scenario 2 — Next year, fair value drops to $1,700,000** (after $100,000 more depreciation, carrying amount is $1,800,000):
- Loss = $1,800,000 - $1,700,000 = $100,000
- Revaluation surplus exists at $300,000
- Entry: Dr. Revaluation Surplus $100,000 / Cr. Warehouse $100,000
- The loss **reduces OCI** first — no income statement impact

**Scenario 3 — Fair value drops further to $1,400,000** (carrying amount after depreciation is $1,600,000, surplus has $200,000 remaining):
- Total loss = $1,600,000 - $1,400,000 = $200,000
- First $200,000 offsets remaining surplus → OCI
- Surplus is now zero, so any additional loss goes to P&L
- In this case, the surplus absorbs all $200,000

**Key rules to memorize:**

1. **Upward revaluation** → OCI (unless reversing a prior P&L loss)
2. **Downward revaluation** → reduce OCI surplus first, then P&L for the excess
3. Revaluations must be done for the **entire class** of assets, not cherry-picked
4. After revaluation, depreciation is based on the **new carrying amount**
5. The revaluation surplus can be transferred to retained earnings as the asset is used or disposed of, but it is **never recycled through P&L**

**Exam tip:** Watch for questions that test the P&L vs. OCI routing. The CFA exam loves giving a sequence of revaluations and asking where each gain or loss is reported.

Practice revaluation problems in our CFA Level I question bank on AcadiFi.

How does the revaluation model under IAS 16 work for property, plant, and equipment?

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