A company owns a class of office buildings and wants to carry them at fair value on the balance sheet after initial recognition, with periodic revaluations and any increase taken to other comprehensive income (subject to the usual reversal-of-prior-decrease rule). Under IAS 16, and separately under US GAAP, is this measurement approach available for property, plant and equipment?
- IAS 16 permits an entity to elect this revaluation model, applied consistently to an entire class of assets; US GAAP does not permit revaluation and requires the historical cost model
- US GAAP permits this revaluation model for any class of property, plant and equipment; IAS 16 requires the cost model with no revaluation option
- Neither IAS 16 nor US GAAP permits any form of revaluation of property, plant and equipment above depreciated historical cost
- Both IAS 16 and US GAAP require all property, plant and equipment to be revalued to fair value at each reporting date
Why A? And why not the others?
Correct answer: A. IAS 16 permits an entity to elect this revaluation model, applied consistently to an entire class of assets; US GAAP does not permit revaluation and requires the historical cost model
IAS 16 allows an entity to choose, as an accounting policy applied to an entire class of property, plant and equipment, either the cost model or the revaluation model; under the revaluation model the asset is carried at its fair value at the revaluation date less subsequent depreciation and impairment, with increases generally recognized in other comprehensive income and accumulated as revaluation surplus, subject to reversing any previous decrease recognized in profit or loss for that same asset. US GAAP has no equivalent policy choice: property, plant and equipment is measured using the historical cost model, less accumulated depreciation and impairment, and upward revaluation to fair value is not permitted under any circumstances. The option reversing which framework allows revaluation is wrong because it attributes the optional revaluation model to US GAAP and a cost-only requirement to IAS 16, which is the opposite of each standard's actual position. The option claiming neither framework permits revaluation is wrong because IAS 16 explicitly offers it as an accounting policy choice. The option claiming both frameworks mandate revaluation at each reporting date is wrong because even under IAS 16 the revaluation model is elective, not mandatory, and revaluations only need to occur with sufficient regularity to keep carrying amounts from materially differing from fair value.
Source: IFRS Foundation, IAS 16 Property, Plant and Equipment, paragraphs 29-31 (cost model and revaluation model); FASB Accounting Standards Codification ASC 360 Property, Plant, and Equipment (historical cost model, no revaluation)