The Schweser text does an insufficient job of explaining this IMO:
So let’s say your company is subject to IFRS reporting standards. You have a luxury car service company that uses Rolls Royces, valued at 500k each with a salvage value of 100k and a supposed useful life of 5 years (sounds ridiculous to me). Theoretically, the Rolls Royces lose 80k in value each year.
After 2 years, you have enjoyed 160k of depreciation expense.
Assume that the prices of the cars go up in value over time, AND that you can easily ascertain the value each year with eBay quotes.
How would an auditor treat this in the income statement if the car’s FMV (even with its 2 years use) went to 800k?
How would he treat it in the balance sheet?
Under IFRS, are the auditors ever obligated to do revaluation or is this always optional?
The revaluation is optional under IFRS. It is not mandatory.
Since the firm PP&E appreciated in value. In the balance sheet they can increase the value of their PP&E. The same would be reflected by a propotionate decrease in the COGS in the Income statement.
Had the FMV decreased they would have stored that in the valuation account (in the income statement), if they are hopeful that there is a possiblity of reversal in the future.
The revaluation model is always optional … in fact it is seldom applied. Companies which follow this approach usually decide to do so only in respect of land and buildings, an asset class that has a tendency to appreciate in value.
When you revalue upwards, the carrying amount of the asset in the balance sheet increases and the increase is taken to Other Comprehensive Income (OCI) and ultimately impacts Revaluation surplus, which is a line within equity. The effects of upward revaluations are not taken to the Income Statement.