IAS 16 Cost Model Vs Revaluation Model STATES that ‘COST’ Model values assets at their historical cost less accumulated depreciation, while the ‘REVALUATION’ Model allows for the upward or downward adjustment of assets Carrying Amounts based on their fair value (FV).
Under IAS 16 (Property, Plant and Equipment), entities are permitted to choose between two distinct accounting policies for measuring non-current tangible assets after initial recognition: the Cost Model and the Revaluation Model. This choice has wide-reaching implications for balance sheet presentation, income statement volatility, tax planning, and stakeholder communication.
The selected policy must be applied consistently to an entire class of assets (e.g., land, buildings, machinery) selecting individual assets within a class is not permitted. Once adopted, a change in policy is only appropriate when it results in more relevant and reliable financial information.
Assets are carried at historical cost less accumulated depreciation and any accumulated impairment losses. Simple, objective, and auditor-friendly.
Assets are carried at fair value at the revaluation date, less subsequent depreciation and impairment. Reflects current market realities in financial statements.
Both models are governed by IAS 16 (Property, Plant and Equipment) (paragraphs 30–42). The standard also applies to investment property measured under IAS 40’s cost model. ASPE and US GAAP do not permit the revaluation model.
The Cost Model is the simpler and more widely used of the two approaches globally. Under this model, an asset’s carrying amount is its original cost at acquisition, reduced over time by systematic depreciation and any impairment write-downs.
Historical Cost Basis: The asset is initially recognised at cost which includes the purchase price plus all directly attributable costs to bring the asset to its intended location and condition (e.g., installation, import duties, professional fees).
Depreciation: The depreciable amount (cost minus residual value) is allocated over the asset’s useful life using a consistent method such as straight-line, diminishing balance, or units-of-production.
Impairment Testing: Under IAS 36, assets are tested for impairment whenever there is an indicator of a potential decline in recoverable amount below carrying value. An impairment loss is recognised immediately in profit or loss.
No Upward Revaluation: A fundamental constraint i.e. the carrying amount can never be written up under the cost model, even if the asset’s fair value has risen substantially above its carrying amount.
The cost model is particularly suitable for assets whose value does not change dramatically over time, or where fair value measurement is costly or impractical such as specialised industrial machinery, IT hardware, or minor fixtures.
The Revaluation Model allows and requires an entity to periodically reset an asset’s carrying amount to its fair value. This provides users of financial statements with more current and decision-useful information about the economic value of the assets controlled by the entity.
Fair Value: Fair value is typically determined by reference to an active market (e.g., land prices), by professional valuation, or by reference to market-based evidence. For specialised assets with no active market, the income or depreciated replacement cost approach may be used.
Frequency of Revaluations: Revaluations must be performed with sufficient regularity to ensure the carrying amount does not differ materially from fair value at the reporting date. Assets in volatile markets (e.g., prime real estate) may require annual revaluation; others may only need it every 3–5 years.
Revaluation Surplus: An increase in an asset’s carrying amount is recognised directly in Other Comprehensive Income (OCI) and accumulated in equity under “Revaluation Surplus” not through profit or loss.
Revaluation Decrease: A decrease is first offset against any existing revaluation surplus for that same asset. Any excess decrease is charged to profit or loss as an expense.
Reversal of Prior Decrease: If an asset was previously written down through profit or loss, a subsequent revaluation increase is recognised in profit or loss up to the amount previously expensed. Any remaining increase goes to OCI.
When an asset is revalued, the entire class of assets to which it belongs must be revalued simultaneously. Selective revaluation within a class is not permitted under IAS 16.
| Dimension | Cost Model | Revaluation Model |
|---|---|---|
| Standard Reference | IAS 16, Para. 30 | IAS 16, Para. 31 |
| Measurement Basis | Historical cost | Fair value at revaluation date |
| Upward Revaluation Allowed? | ❌ Not permitted | ✅ Required when FV differs materially |
| Gains Recognised In | Not applicable | Other Comprehensive Income (OCI) |
| Losses Recognised In | Profit or Loss (impairment) | OCI first; then Profit or Loss |
| Equity Impact | None (beyond retained earnings) | Revaluation Surplus in equity |
| Depreciation Base | Cost − Residual Value | Revalued Amount − Residual Value |
| P&L Volatility | Low (predictable depreciation) | Higher (valuation movements can flow through) |
| Complexity | Simple | Complex — requires professional valuations |
| Cost to Apply | Low | Higher (valuer fees, admin) |
| Balance Sheet Relevance | May understate asset values | Closer to economic reality |
| Comparability | Higher across companies | Lower (judgment in fair values) |
| Tax Implications | Simpler deferred tax position | Creates deferred tax liability on surplus |
| Permitted Under US GAAP? | ✅ Yes | ❌ Not permitted |
| Permitted Under IFRS? | ✅ Yes | ✅ Yes |
| Common Industries | Manufacturing, IT, Retail | Real estate, Infrastructure, Utilities |
To understand the differences of Cost Model Vs Revaluation Model, consider a building purchased for $500,000 with a useful life of 40 years (straight-line depreciation, zero residual value). After 5 years, its fair value is assessed at $600,000.
| Account | DR ($) | CR ($) |
|---|---|---|
| Depreciation Expense | 12,500 | — |
| Accumulated Depreciation — Building | — | 12,500 |
After 5 years: Carrying Amount = $500,000 − $62,500 = $437,500
At year 5, the building is professionally valued at $600,000. The carrying amount is $437,500. The increase of $162,500 is recognised as follows:
| Account | DR ($) | CR ($) |
|---|---|---|
| Accumulated Depreciation — Building | 62,500 | — |
| Building (Asset Account) | 162,500 | — |
| Revaluation Surplus (OCI → Equity) | — | 162,500 |
| Accumulated Depreciation — Building | — | 62,500 |
After revaluation, depreciation is recalculated. New depreciable amount = $600,000 ÷ 35 remaining years = $17,143 per year higher than before, which reduces future profits compared to the cost model.
If the building’s value subsequently fell to $550,000 (a decrease of $50,000 from $600,000), the entry would be:
| Account | DR ($) | CR ($) |
|---|---|---|
| Revaluation Surplus (OCI) | 50,000 | — |
| Building (Asset Account) | — | 50,000 |
Note: If the decrease exceeds the existing surplus balance, the excess is charged to Profit or Loss.
The choice between models should be driven by the nature of the assets, market conditions, user needs, and cost-benefit considerations not simply by which model makes the financial statements look more flattering.
The Cost Model offers reliability, simplicity, and global comparability. The Revaluation Model sacrifices some of that consistency in exchange for a more faithful representation of economic value, making the choice ultimately a question of what matters most to the entity’s stakeholders and financial strategy.
(Qualified) Chartered Accountant – ICAP
Master of Commerce – HEC, Pakistan
Bachelor of Accounting (Honours) – AeU, Malaysia