AE 15 — Financial Accounting and Reporting, Topic 5 (Integrated)

Revaluation Model
Fair value measurement of property, plant and equipment subsequent to its initial
recognition

Miles N.M. Santos, CPA

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Revaluation Model

After the recognition as an asset, an item of property, plant and equipment whose fair
value can be measured reliably can be carried at a revalued amount.

The revalued amount is the fair value at the date of the revaluation less any
subsequent accumulated depreciation and subsequent impairment losses.

Carrying amount = Fair value at revaluation date — Accumulated Depreciation — Accumulated Impairment Losses

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Accounting procedure

1. Determine the sound value (SV) of the asset. This is the fair value of the asset at the revaluation date.
This is also called the depreciated replacement cost.
2. When the SV given, calculate its related accumulated depreciation by dividing the amount by the
percentage of accumulated depreciation based on cost minus 1.
A/D based on revaluation model = SV ÷ (1 - %ofAD based on cost)
When the SV is not given, use the replacement cost of the asset and further multiply the amount by the
percentage of accumulated depreciation using cost model to get the A/D based on revaluation model.
A/D based on revaluation model = RC x %ofAD based cost
In all cases, %ofAD based on cost is calculated as:
%ofAD based on cost = Accumulated depreciation based on cost ÷ Depreciable amount

3. The difference between the carrying amount of the asset based on cost and the carrying amount based
on revaluation is called the revaluation surplus.

Revaluation surplus is an OCI item. It will be closed subsequently to the retained earnings when
the asset is sold or by piecemeal realization.

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 On December 31, 2021, Krobelus Company reported the following information:
Equipment 6,250,000
Accumulated depreciation 2,187,500
The equipment was measured using the cost model and depreciated on a straight-line basis over a 10-year period. On the same date,
the management decided to change the basis of measuring the equipment from the cost model to the revaluation model.
The equipment had a fair value of 5,687,500 with a remaining useful life of 5 years on December 31, 2021.

Cost model Revaluation model Increase

Cost 6,250,00 8,750,000 2,500,000

Less: Accumulated depreciation (2,187,500) (3,062,500) (875,000)

CA/SV/RS 4,062,500 5,687,500 1,625,000

Illustration 4
Proportional versus elimination method

Proportional method

Equipment 2,500,000

Accumulated depreciation 875,000

Revaluation surplus 1,625,000

Elimination method

Accumulated depreciation 1,625,000

Revaluation surplus 1,625,000

The difference between two methods is how the revaluation is being accounted. In proportional method, there is
an addition to the cost of the asset as a result of revaluation. However, in elimination method, instead of
recognizing an additional amount to the cost of the asset to reflect its fair value, the accumulated depreciation is
being decreased by the amount of revaluation surplus.
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Subsequent to the date of revaluation

Subsequent to the date of revaluation, the following are the considerations that must be observed:

1. The depreciation shall be based on the SV over the remaining useful life of the asset.
2. The revaluation surplus shall be realized to retained earnings over the remaining useful life of the asset,
i.e., piecemeal realization.

Subsequent to the date of the

Depreciation 1,137,500

Accumulated depreciation 1,137,500 (5,687,500/5 years)

Revaluation surplus 325,000

Retained earnings 325,000 (1,625,000/5 years)

Reversal of revaluation occurs when the new revaluation of asset results to a decrease in the carrying amount
and the balance of revaluation surplus previously recognized cannot compensate the decrease. As a result, a
revaluation loss is recognized. However, this loss is charged to expense in the profit or loss statement.

Assuming on December 31, 2022, the fair value of the equipment is 2,600,000. How much is the revaluation loss?

Previous revaluation Current revaluation Decrease

Cost 8,750,000 5,000,000 3,750,000

Less: Accumulated depreciation (4,200,000) (2,400,000) (1,800,000)

CA/SV/RS 4,550,000 2,600,000 1,950,000

Accumulated depreciation 1,800,000

Revaluation surplus 1,300,000

Revaluation loss 650,000

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Equipment 3,750,000