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.
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IAS 16 Cost Model
‘Cost Model’ is a traditional approach to asset valuation, where assets are recorded on a company’s balance sheet at their original cost.
Over time, the assets’ carrying amount is reduced by accumulated depreciation.
1. Historical Cost
Assets are INITIALLY recorded at their historical cost, which represents the amount paid to acquire or produce the asset.
Assets are systematically depreciated over their useful life using methods like straight-line, reducing balance (WDV) or units of production, reflecting their expected consumption or obsolescence.
It is straightforward and easy to apply. It relies on objective and verifiable historical cost data.
|Lack of Timeliness; |
It may not reflect the current market value of assets, especially when their fair values significantly deviate from their historical costs.
Since asset’s carrying amounts are not subject to frequent revaluations, it provides stability and consistency in Financial Statements.
It fails to capture changes in the value of assets over time, potentially leading to a distorted representation of a company’s Financial Position.
It generally results in a conservative valuation as assets are not upwardly adjusted to their current fair value.
IAS 16 Revaluation Model
‘Revaluation Model’ allows companies to adjust the carrying amount of their assets to reflect their current fair value. It provides an opportunity to recognize unrealized gains or losses directly in the financial statements.
1. Fair Value Adjustment
Assets are INITIALLY recorded at historical cost but can be revalued periodically to reflect their current fair value.
2. Surplus or Deficit Recognition
Any INCREASE or DECREASE in the asset’s fair value is recognized as a surplus or deficit directly in equity.
It provides more relevant and up-to-date information about the value of assets, especially when there are significant fluctuations in market values.
Determining the fair value of assets involves judgment and estimation, making it subject to bias or manipulation.
|Improved Decision Making; |
Revalued assets provide a clearer picture of a company’s financial position, allowing stakeholders to make more informed decisions.
|Potential Volatility; |
Frequent revaluations can introduce volatility into a company’s financial statements, particularly if asset values fluctuate significantly.
Cost Model Vs Revaluation Model – What Is the Difference?
- Valuation Basis: The COST Model relies on historical cost, while the REVALUATION Model uses fair value.
- Frequency of Adjustments: The COST Model requires minimal adjustments, whereas the REVALUATION Model allows for periodic revaluations.
- Volatility: The COST Model provides stability, while the REVALUATION Model can introduce volatility into financial statements.
- Timeliness: The COST Model may lag in reflecting current market values, whereas the REVALUATION Model provides more current and relevant information.
The Bottom Line
The concept Cost Model Vs Revaluation Model STATES that, it’s essential to comply with the applicable Accounting Standard (IAS 16) and DISCLOSE the valuation method in Financial Statements. Companies MUST carefully evaluate the pros and cons of each Model.
Chartered Accountant (Institute of Chartered Accountants of Pakistan)
Bachelor of Accounting Honours (Asia e University, Malaysia)