Revaluation model is a model that is used for measurement of various fixed assets of a business. The model applies to all fixed tangibles and intangible assets. Standards permit its application if it results in better presentation of information.
Cost model states that a fixed asset should be reported in the balance sheet at cost less accumulated depreciation and impairment losses. Revaluation model states that an asset should be revalued at each reporting date and depreciated with respect to new useful life and new fair value. The difference between carrying amount and the revalued amount should be recognized as revaluation surplus or revaluation deficit as a reserve.
Suppose a company purchased a plant three years back in 2011 at a cost of $50,000. The useful life of the plant was determined at the time of purchase equal to 10 years with no salvage value. It is company’s policy to depreciate all its plants using straight-line method.
Accounting As Per Cost Model
2011 2012 2013
Cost $50,000 $50,000 $50,000
Less: Accumulated depreciation -5,000 -10,000 -15,000
Carrying value 45,000 40,000 35,000
In the start of 2014 the company adopted the revaluation model and the revalued amount of the plant was estimated to be $48,000 with remaining useful life of 6 years after which the plant can be sold for $6,000.
Less: Accumulated depreciation -15,000
Carrying value at the end of 2013 35,000
Revaluation of plant in 2014 48,000
Revaluation surplus 13,000
Depreciation for 2014 (48,000-6000)/6 = 7,000
Plant at Fair value $48,000
Less: Accumulated depreciation -7,000
Carrying value 41,000
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