REVALUATION MODEL

What is the Revaluation Model?

The revaluation model gives a business the option of carrying a fixed asset at its revalued
amount. Subsequent to the revaluation, the amount carried on the books is the asset's fair
value, less subsequent accumulated depreciation and accumulated impairment losses. Under
this approach, one must continue to revalue fixed assets at sufficiently regular intervals to
ensure that the carrying amount does not differ materially from the fair value in any period. This
option is only available under international financial reporting standards (IFRS).

Cost model does not reflect the changes in the fair values of the PPE items. Instead, it reports
carrying amounts of PPE equal to their cost less accumulated depreciation and accumulated
impairment losses. The main drawback of the cost model is that the carrying amount of an
asset may not be close enough to its actual current value especially if the asset was acquired
many years ago. To combat this limitation of the cost model, the revaluation model was
introduced.

MEASUREMENT UNDER THE REVALUATION MODEL

The PPE shall be carried at a revalued amount – which is equal to its fair value at the date of
the revaluation less any subsequent accumulated depreciation and subsequent
accumulated impairment losses.
Additional concepts regarding the revaluation model are as follows:
a. Revaluation model is applicable only to assets with reliably measurable fair value since it
is the basis for revaluation. The revaluation model is applicable to land and to a very limited
extent, buildings.
b. Revaluations shall be made with sufficient regularity to ensure that the carrying amount
does not differ materially from its fair value.
c. When the fair value of a revalued asset differs materially from its carrying amount,
further revaluation is required.
If the PPE experiences significant and volatile changes in fair value, annual revaluation may
be necessary. Otherwise, revaluation may be made every three or five years.
d. If an item of PPE is revalued, the entire class of PPE to which that asset belongs shall
be revalued.
e. Revaluation of assets in the same class shall be made simultaneously (i.e.as of the
same date) to prevent selective revaluation.

DETERMINING THE FAIR VALUE OF PPE

In determining the fair value of PPE, an entity may use one or combination of the following
valuation techniques under PFRS 13, Fair Value Measurement:
a. Market approach - uses prices and other relevant information generated by market
transactions involving identical or comparable assets.
b. Cost approach - reflects the amount that would be required currently to replace the service
capacity of an asset.
c. Income approach – converts future amounts of cash flows or income and expenses to a
single current discounted amount.
For revaluation purposes, it is important to identify what amount is provided, which can be fair
value or replacement cost.
Assets to be revalued Amount Provided
Fair value Replacement Cost
Non-depreciable Use the fair value as is Use the replacement cost as
the fair value
Depreciable Use the fair value as is Determine the sound value
as the deemed fair value
The sound value considers the characteristics of the depreciable asset, which is primarily driven
by its remaining useful life (i.e, total useful life less age of the asset on the revaluation
date)relative to its estimated useful life.
Sound value = Replacement cost x Total useful life – Age on the date of revaluation
Total useful life
Illustration 1. An entity is planning to revalue its lands and buildings. In connection with this, it
determined the following information as of December 31, 2023:
a. Land 1 has fair value of P5,000,000
b. Land 2 has replacement cost of P4,000,000
c. Building 1 has a fair value of P6,000,000, age of 8 years and total useful life 30 years.
d. Building 2 has a replacement cost of P7,000,000, age 10 years and total useful life of 40
years.
For revaluation purposes, the Land 1’s fair value of P5,000,000 and Building 1;s fair value
of P6,000,000 shall not be adjusted and shall be used outright for revaluation purposes since
they are already the amounts of “fair value”.
The Land 2’s replacement cost of P4,000,000 shall not be adjusted since it is a non-
depreciable asset.
However, the Building 2’s replacement cost of P7,000,000 shall be adjusted to the
equivalent sound value since it is a depreciable asset.
Sound value = P7,000,000 x 40 yrs -10 yrs. = P5,250,000
40 years

RECOGNITION OF REVALUATION
On the revaluation date, an entity shall compare the PPE’s carrying amount and its
corresponding fair value. This comparison will have the following consequences:
Scenarios Accounting Procedures
Fair Value > There shall be a revaluation increase. The relevant accounting
Carrying amount procedures are as follows:
a. Generally, the difference is recorded as increase in other
comprehensive income (OCI) and accumulated in equity under the
heading of revaluation surplus.
b. However, if there is a previous revaluation decrease, the increase
shall be charged to profit or loss to the extent it reverses the
revaluation decrease that was previously charged to profit or loss.
Fair value < There shall be a revaluation decrease. The relevant accounting
Carrying amount procedures are as follows:
a. The difference is recognized as a reduction from OCI to the extent
of any credit balance existing in the revaluation surplus in respect
of that asset. This also reduces the amount of revaluation surplus
accumulated in equity.
b. If the balance of revaluation surplus in respect of that asset has
been exhausted, the excess revaluation decrease shall be recognized
in profit or loss.
In other words, the revaluation surplus shall always have a credit
balance (i.e., debit balance is not allowed).

Under both of these scenarios, the subsequent depreciation for revalued depreciable assets
shall be adjusted or accounted prospectively.
If there is a revaluation increase, subsequent annual depreciation will most likely increase
while if there is a revaluation decrease, subsequent annual depreciation will most likely
decrease.

Illustration 2 – Revaluation Increase. As of December 31, 2023, ANDREW Co. had a land
(accounted for using revaluation model) with carrying amount of P5,000,000 and fair value of
P5,600,000.
In the absence of previous revaluation decrease, the P600,000 increase in fair value shall be
recognized wholly as increase in OCI and revaluation surplus.
However, assuming that the land was previously subjected to revaluation decrease during
2020 that resulted to P450,000 decrease in profit or loss, the P600,000 revaluation increase
shall be recognized in 2023 as P450,000 increase in profit or loss (i.e., reversal of revaluation
decrease recognized in 2020 profit or loss), and P150,000 increase in OCI and in revaluation
surplus for the balance.

Illustration 3 – Revaluation Decrease. As of December 31, 2023, BEATRICE Company

reported a land with carrying amount of P6,500,000 and related revaluation surplus of
P700,000. Total revaluation surplus of the Company amounted to P1,800,000. Required:
Under each of the following independent scenarios, determine the accounting for the revaluation
decrease of the land:
1. The land has a fair value of P6,000,000.
2. The land has a fair value of P5,200,000.
Solution:
Amount of Revaluation Amount recognized Amount recognized
decrease in OCI in profit or loss
Scenario 1 P500,000 (P6M-P6.5M) P500,000 decrease None
Scenario 2 P1,300,000 (P5.2M- P700,000 decrease P600,000 (P1.3 M-
P6.5M) (to the extent of P700K)
balance)
Note: a. The revaluation surplus of P1,100,000 (P1,800,000 – P700,000) related to other
assets is irrelevant in all scenarios.
b. In scenario 1, after recording the revaluation decrease, the revaluation surplus related to the
land will be reduced to P200,000 (P700,000 – P500,000).
Revaluation decreases can be related to impairment of the PPE.

ACCOUNTING FOR REVALUATION SURPLUS

The revaluation surplus shall be subsequently accounted for as follows:
Related Asset Accounting Procedures
Non-Depreciable The revaluation surplus may be transferred directly to retained
(e.g.,land) earnings upon the derecognition of PPE.
Depreciable (e.g., Portion of the surplus is periodically and directly transferred to
building, retained earnings. The amount transferred is normally the difference
equipment, etc.) between the following:
a. Depreciation based on the carrying amount, as if there is no
revaluation.
b. Depreciation based on the revalued amount.
Alternatively, the periodic transfers can also be computed as:
Periodic transfers = Revaluation surplus
Remaining useful life
The transferring of revaluation surplus is not considered as a reclassification adjustment since it
is directly transferred to retained earnings (R.E.) (i.e., not through profit or loss) and will not
affect the entity’s comprehensive income. This treatment is similar to the direct transfer to
retained earnings of cumulative unrealized gains and losses – OCI from investments in equity
securities at FVTOCI.
The revaluation surplus account can be analyzed as follows:
Revaluation surplus
Revaluation decreases xx xx Beg. Balance
Direct transfers to R.E. xx xx Revaluation increases
End. Balance (squeeze) xx
Totals (should be equal) xx xx

Note: The balance in the revaluation surplus as of any given date is the difference between the
following (amount (a) below shall be higher than amount (b)):
a. Carrying amount based on the revalued amount; and
b. Carrying amount based on the original cost (depreciated, if relevant)

RECORDING OF REVALUATION – NON-DEPRECIABLE ASSETS

Recording of revaluation of non-depreciable assets (e.g., land) is fairly straightforward. If
there is a revaluation increase, the proforma entry is as follows:
Land – xxx
Revaluation surplus xxx
Gain on reversal of impairment (if any) xxx

If there is a revaluation decrease, proforma journal entry is as follows:

Impairment Loss (if any) xxx
Revaluation surplus (if any) xxx
Land xxx
Right after the revaluation, the carrying amount of the non-depreciable asset is equal to
its fair value (or if relevant, sound value).

Illustration 4: On January 1, 2023, ACNESTIS Company acquired a land for P2,000,000. The
Company has a policy of applying revaluation method to its lands. As of December 31, 2023,
and 2024, the fair values of the land were P2,000,000 and P2,700,000, respectively. On March
31, 2025, the land was sold for P2,900,000.

Dec. 31, 2023 No revaluation shall be made (the FV of the land is the same as its carrying
amount)

December 31, 2024 Land - 700,000

Revaluation surplus (2.7M-2M) 700,000

Mar. 1, 2025 Cash - 2,900,000

Land 2,700,000
Gain on sale of land (P/L) 200,000
Note: The basis of the gain on sale is the revalued amount of P2,700,000 and not the original
cost of P2,000,000. The entry to directly transfer the balance of revaluation surplus to retained
earnings is as follows:
Revaluation surplus 700,000
Retained earnings 700,000

Considering the journal entries on the date of sale, there is a P900,000 net increase in retained
earnings (P200,000 gain to be ultimately closed to retained earnings + P700,000 direct transfer
to retained earnings). This is equal to the difference between the P2,900,000 proceeds and the
P2,000,000 original cost.

Illustration 5: Revaluation Increase then Decrease. On Jan. 1, 2023, DEXTERITY

Company acquired a land for P3,000,000. The Company has an accounting policy of revaluing
all of its lands. The fair values of the land as of December 31, 2023 and 2024 were P4,000,000
and P3,600,000 respectively.

As of Dec. 31, 2023, there is a revaluation increase of P1,000,000 since the fair value of
P4,000,000 is higher than the carrying amount of P3,000,000:
Land 1,000,000
Revaluation surplus 1,000,000
As of December 31, 2024, there is a revaluation decrease of P400,000 since the fair value of
P3,600,000 is lower than the carrying amount of P4,000,000:
Revaluation surplus (3.6M-4M) 400,000
Land 400,000
Note: No amounts were charged to profit or loss since the amount of decrease did not
fully exhaust the balance of the revaluation surplus. Right after the revaluation, revaluation
surplus will decrease to P600,000 (P1,000,000- P400,000).

Illustration 6: Using the same information as in DEXTERITY Company, except that the fair
value as of December 31, 2024 is P2,800,000.

Dec. 31, 2024, there is a revaluation decrease of P1,200,000 (P4,000,000-P2,800,000):

Impairment Loss – P/L (squeeze) 200,000
Revaluation surplus 1,000,000
Land 1,200,000

Note: The P1,000,000 balance of revaluation surplus was not able to wholly absorb the
P1,200,000 revaluation decrease. By applying the rules it there is a revaluation decrease, the
excess of P200,000 shall be charged to profit or loss in the form of impairment loss.

Illustration 7: Revaluation Decrease then Increase. On July 1, 2023, TANTALIZING

Company acquired a land for P2,500,000. The Company has a policy of applying revaluation
method on all of its lands. As of December 31, 2023, and 2024, the fair values of the land were
P200,000,000 and P2,900,000, respectively.

As of Dec. 31, 2023, there is a P500,000 revaluation decrease since the P2,000,000 fair value
is lower than the P2,500,000 carrying amount:
Impairment loss (P2M-P2.5M) 500,000
Land 500,000
Note: Since there is no balance in the revaluation surplus, the revaluation decrease of P500,000
will be automatically charged to profit or loss. The land’s carrying amount will now be
P2,000,000 as of Dec. 31, 2023.

As of Dec. 31, 2024, there is a P900,000 revaluation increase since the P2,900,000 fair value
is higher than the P2,000,000 carrying amount:
Land (P2.9 M – P2M) 900,000
Gain on reversal of impairment – P/L 500,000
Revaluation surplus (P900K-P500K) 400,000
Note: The first P500,000 of the revaluation increase is recognized in profit or loss as a reversal
of the previous impairment loss recognized in 2023. The excess of the revaluation increase
above this amount (P400,000 = P900,000 – P500,000) is recognized as revaluation surplus in
OCI.

RECORDING OF REVALUATION – DEPRECIABLE ASSETS

Recording of revaluation of depreciable assets can be a bit complicated due to the accumulated
depreciation element. Nonetheless, they can be recorded using either of the following methods:
Method Accounting Procedures
Elimination The accumulated depreciation is eliminated against the gross carrying
 Method amount of the asset. Right after revaluation, the cost is equal to fair value
while the accumulated depreciation will have zero balance. This is the easier
of the two methods.
Proportional The cost and accumulated depreciation are proportionately restated that is
method consistent with the revaluation of the carrying amount of the asset. Specific
procedures are as follows:
a. If the amount used in revaluation is the “fair value”, the following formulas
are relevant in determining the amounts of restatement:
Restated cost = FV of the asset x Total useful life
Remaining useful life

Restated accum. Depreciation = Restated cost- Fair value of the asset

Alternatively, these restated amounts can also be determined as follows:
Restated cost = Recorded cost x FV of the asset_______
Carrying amount (CA) of the asset

Restated accum. Depreciation = Recorded accum. Depn x FV of the asset

CA of the asset
B. If the amount used in revaluation is the “replacement cost”, the restated
cost is equal to the given replacement cost, while the restated
accumulated depreciation is determined as follows:
Restated accum. Depn = Replacement cost x Age of the asset
Total useful life

Regardless of these differences, both of these methods shall arrive at the same amount of
revaluation surplus and carrying amount of asset.

Illustration 8: Depreciable Asset, Revaluation Increase. On January 1, 2023, BEGONIA

Company acquired a machinery with estimated useful life of five years for P3,500,000. The
Company has a policy of applying the revaluation method to all of its machineries. The relevant
depreciation method to be used is the SLM. As of Dec. 31, 2024, the fair value of the
machinery was P2,400,000.

To account for this problem, it is important to first compute for the carrying amount of the
machinery as of Dec. 31, 2024 by applying the depreciation concepts. The annual depreciation
will be P700,000 (P3,500,000/5 yrs.)
Date Annual Depn (A) Cost (B) Accumulated Depn (A-B) Carrying Amount
Dec. 31, 2023 P700,000 P3,500,000 P 700,000 P2,800,000
Dec. 31, 2024 700,000 3,500,000 1,400,000 2,100,000
There is a revaluation increase of P300,000 since the fair value of P2,400,000 is higher than
the P2,100,000 carrying amount.

Elimination Approach of Recording

Under this approach, the accumulated depreciation based on the lapsing schedule shall be
eliminated first against the cost:
Accumulated depreciation 1,400,000
Machinery 1,400,000

Then, the resulting gross carrying amount of P2,100,000 (P3,500,000 – P1,400,000) will be
increased to its fair value of P2,400,000, resulting to P3,500,000-P1,400,000) will be increased
to its fair value of P2,400,000 resulting to P300,000 revaluation increase:
Machinery 300,000
Revaluation surplus (P2.4M – P2.1M) 300,000

Proportional Approach of Recording

Since the given information is the machinery’s fair value, the gross carrying amount and
accumulated depreciation are restated as follows:
(A) (B) (B) – (A)
Before Revaluation Restated After Rev. Increase (Decrease)
Cost P3,500,000 P4,000,000 P500,000
Less: Accum. Depn. 1,400,000 1,600,000 200,000
Carrying amount P2,100,000 P2,400,000 P300,000

The previous calculations assumed the following:

a. The machinery has been in use for two years, so its remaining useful life is three years (5 yr
total useful life – 2 years). The restated amounts can now be determined as follows:
Restated cost = P2.4M x 5 yrs/3 years = P4,000,000
Restated accum. Depreciation = P4M – P2.4M = P1,600,000

b. Alternatively, the restated gross carrying amount and accumulated depreciation can also be
determined by using the ratio of P2,400,000 fair value over the P2,100,000 carrying amount as
applied to amounts before restatement:
Restated cost = P3.5M x P2.4 M/P2.1M = P4,000,000
Restated accum depn. = P1.4M x P2.4M/P2.1M =P1,600,000

Using the amounts in the last column of the restatement table, the revaluation shall be recorded
on Dec. 31, 2024 as follows:
Machinery 500,000
Accumulated depreciation 200,000
Revaluation surplus (squeeze) 300,000

Generalizations under Both Approaches

Note: Despite the differences in recording under the elimination and proportional approach:
a. The carrying amount of machinery and revaluation surplus are equal to P2,400,000 and
P300,000, respectively, under both approaches.
b. Moving forward, the annual depreciation of the machinery will be revised to P800,000
(P2,400,000/3 year remaining useful life) Under both approaches.
c. The amount of annual piecemeal transfer of P100,000 from revaluation surplus to retained
earnings is computed as follows:
Annual depreciation based on revalued amount (P2,400,000/3) P800,000
Annual depreciation based on original cost (P2,100,000/3) 700,000
Annual piecemeal transfer to retained earnings P100,000

The annual piecemeal transfer to retained earnings can also be determined as revaluation
surplus /est. remaining useful life (assuming SLM is still used in subsequent depreciation),
which in this case:
Annual piecemeal transfer = P300,000 revaluation surplus = P100,000
3-year remaining useful life
Journal entry to transfer portions of the revaluation surplus to retained earnings every year from
2024 to 2026:
Revaluation surplus 100,000
Retained earnings 100,000
Note: In the subsequent periods, the revaluation has no effect to the Retained earnings.
The P100,000 increase in annual depreciation (P800,000-P700,000) is countered by the
P100,000 annual direct piecemeal transfers of revaluation surplus to retained earnings.
d. At the end of each year, the balance of revaluation surplus can be computed as:
Carrying Amount – 12/31 2024 2025 2026
Based on revalued amount P2,400,000 P1,600,000 P800,000
Less: Based on original cost 2,100,000 1,400,000 700,000
Revaluation surplus P 300,000 P 200,000 P100,000
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