The cost model and the revaluation model are the two models an entity may choose for the valuation of assets subsequent to their initial recognition. Under the cost model, an asset is carried after its initial recognition at cost less accumulated depreciation and impairment loss, with the depreciation and the impairment loss being expensed directly in the income statement.
While the revaluation of assets to their fair value is required under IFRS, it is prohibited under US GAAP. Under the revaluation model, assets for which fair value can be established are carried after their initial recognition at a revalued fair value amount less any subsequent depreciation and impairment losses.
Using the revaluation model, any revaluation increase is credited to a revaluation reserve in equity and any previously expensed revaluation reversal is credited to income. A revaluation reserve is a line item in a firm’s owners’ equity resulting from a revaluation increase in an asset typically recorded as “supplementary capital”, since it is not generated from ordinary business.
|Asset Revaluation – US GAAP vs. IFRS|
|Asset revaluation is not allowed.||Periodic revaluation of an entire class of fixed assets to fair value is permitted.|
The periodic valuation of nonfinancial assets whether there is any objective evidence of the impairment of its assets is impairment testing. Impairment testing is required when there is an indicator of asset impairment; goodwill and certain intangible assets require an annual impairment test. While the reversal of impairment losses is prohibited under US GAAP, impairment reversals are allowed for under IFRS.