How does the revaluation surplus for land and buildings work under IFRS, and what goes to OCI vs. profit or loss?

The revaluation model under IAS 16 follows a specific hierarchy that depends on whether the asset was previously written down. Let me walk through the three scenarios with a single asset.

Setup: Brookfield Properties owns a warehouse purchased for $3,000,000 on January 1, 2022. Accumulated depreciation by December 31, 2025 = $600,000. Carrying value = $2,400,000.

Scenario A: First-time revaluation upward

Fair value at Dec 31, 2025 = $2,900,000.

Revaluation gain = $2,900,000 - $2,400,000 = $500,000

Since there was no prior impairment, the entire gain goes to OCI and is accumulated in equity as a revaluation surplus:

Scenario B: Subsequent revaluation downward (still above original depreciated cost)

One year later (Dec 31, 2026), fair value drops to $2,550,000. Carrying value after one more year of depreciation on the revalued amount is approximately $2,800,000.

Revaluation decrease = $2,800,000 - $2,550,000 = $250,000

This decrease is first charged against the existing revaluation surplus in OCI:

Remaining revaluation surplus = $500,000 - $250,000 = $250,000.

Scenario C: Revaluation drops below original depreciated cost

Assume fair value falls further to $2,000,000. The carrying value is $2,550,000, and remaining revaluation surplus is $250,000.

Total decrease = $2,550,000 - $2,000,000 = $550,000

• First $250,000 is charged against the revaluation surplus (OCI) — exhausting it.
• Remaining $300,000 is recognized as a loss in profit or loss.

Key rules:

1. Asset-by-asset basis — you cannot offset a revaluation surplus on Building A against a loss on Building B.
2. No recycling — the revaluation surplus is never "recycled" through profit or loss when the asset is sold. Instead, it is transferred directly from revaluation surplus to retained earnings upon disposal.
3. Land is not depreciated — so after revaluation, land simply sits at the new fair value until the next revaluation. Buildings continue to be depreciated on the revalued amount.
4. Entire class — if you revalue one building, you must revalue the entire class of assets (all land, or all buildings).

Exam tip: US GAAP does NOT permit the revaluation model for PP&E. This is an IFRS-only treatment and a classic CFA Level I GAAP vs. IFRS comparison question.

Explore more IAS 16 scenarios in our CFA Level I FRA practice materials.