Revaluation of fixed assets under US GAAP

3. Revaluation of fixed assets under US GAAP and IFRS

According to US GAAP, under no circumstances can a company write up its fixed assets. However, such upward revaluations are allowed under IFRS providing companies more flexibility in selecting their accounting policy on fixed assets. Namely, IFRS allow both the cost and revaluation model. In case a company elects to apply the revaluation model, it cannot switch to the cost model. Under the revaluation model:

  • fixed assets are carried at their fair values less accumulated depreciation;
  • both downward and upward adjustments are permitted;
  • in the income statement no revaluation gain is recognized, but it is disclosed in the statement of comprehensive income, and
  • revaluations are made with sufficient regularity to ensure that carrying amounts donít differ materially from the fair values at each reporting date. †

Accounting for fixed assets under the revaluation model is slightly more complex. An upward revaluation reserve is recognized in equity in the revaluation surplus account. Any subsequent impairment is firstly allocated to that revaluation surplus, and only when the latter is exhausted the difference is charged to the income statement as an impairment loss.

To summarize, presentation of fixes assets at their fair values, on the one hand, gives more relevant information for decision makers and enhances comparability among companies, while on the other hand, application of the revaluation model is more complex, expensive.† In addition, it is not always possible to determine fair values with a sufficient degree of evidence that gives management an opportunity to manipulate accounting profits.

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