The Revaluation Model - IAS 16

The term ‘revaluation’ has the following meaning in accounting: ‘A revaluation is the difference between the fair value of an asset at the beginning of the reporting period and the fair value of an asset at the end of the reporting period'. Revaluation is a change in the value of the asset.

A valuation is - 'an estimation of the fair value of an asset'. (usually carried out by an indpendent valuer)

IAS 16.31 states: ‘Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period.’

This para must then be read as follows: ‘A change in the value of the asset………AT THE END OF THE REPORTING PERIOD’

Therefore, it is very clear that at the end of each reporting period the company must assess whether there has been a change in the value of an asset (revaluation). This can only be done by obtaining a valuation of the asset at the end of the reporting period and comparing it to the valuation obtained at the end of the previous reporting period. The difference is a change in value upward or a change in value downward. It is important to note that this ANNUAL TEST is obligatory in terms of IAS 16.31.

IAS 16.34 is very clear in its guidance. What this para simply says – how often you will have ‘revaluation’ (having to change the value of the asset) is dependent on the type of assets. Some assets will change in value every 3 to 5 years. However, one cannot determine when such changes will be made without valuing the assets every at the end of the financial reporting period. Land may only change in value every 10 years, while a computer might change in value very 2 years.

Therefore, the IFRS policy should state that the company will revalue (change the value) of an asset every time the valuation of the asset at the end of the reporting period is different to the valuation obtained at the end of the previous reporting period. 'Sufficient regularity’ means that there will never be a time that the value of an asset at the end of the reporting period will be different from its market value as obtained by a valuation at the end of the reporting period.

It must emphasise that a valuation is required at the end of every period not only for directors to satisfy their fiduciary duties but also for the evidence of value for the auditors. 

IAS 16.32 states - 'The fair value of items of plant and equipment is usually their market value determined by appraisal' 

An appraisal is defined as: 'an act of assessing something or someone'

Therfore in order to assess the value of an asset one needs a way to assess and this can only be done via a 'valuation'. IFRS 13 describes three ways this should be done (see IFRS 13).​