Question

U.S. GAAP does not allow the revaluation of fixed assets where as it is allowed under IFRS. Revaluation allows the entity to measure fixed assets at fair value. Discuss the advantages and disadvantages of using revaluation for property, plant, and equipment. Provide an example to support your discussion.

Answer 1

Advantages of using Revaluation Model for PPE are:

1. Revaluations are made after every period. Hence, no time will be spent on work related to Computation of Useful life and residual values which may end up making wrong guesses, thus charging wrong amount of depreciation to the PPE.
2. Revaluation is a very useful tool especially for users of the assets as they reflect the true saleable value of the asset in that area.
3. Under-valued and Overvalued assets affect improper financial performance as well as improper financial position of the company.

Disadvantages of using Revaluation Model for PPE are:

1. Revaluation of PPE is subjective ie It depends upon views and opinions of the appraiser or valuer. Hence, its not based on standard figures.
2. Revaluation of assets is costly in terms of money and time.

Example: The Cost of asset, the accumulated depreciation, WDV and its fair value for next 5 years are follows:

Year	Cost	Accumulated depreciation	WDV	Fair Value
1	50000	9000	41000	45000
2	50000	18000	32000	38000
3	50000	27000	23000	30000
4	50000	36000	14000	20000
5	50000	45000	5000	10000

Thus, there is impact on financial statements ie asset position as well as profits if the assets are not revalued and carried on the book values.