FRA- The Revaluation Model

SHM enterprise, a hypothetical company, owns several investment properties on which it earns rental income. It values the properties using the fair value model based on prevailing rental markets. SHM prepares its financial statements according to IFRS. After two years of increases the market softened in 2010 and values decreased. A summary of the properties’ valuations is as follows:

 Original cost (acquired in 2008) $100.0 million

 Fair value valuation as of December 31, 2008 $102.0 million

 Fair value valuation as of December 31, 2009 $110.0 million

 Fair value valuation as of December 31, 2010 $98.00 million

What will be the impact of the revaluation on the 2010 financial statements?

A. $12 million charge to net income.

B. $10 million charge to revaluation surplus and €2.0 million charge to net income.

C. $12 million charge to revaluation surplus.

Shouldnt the answer be B?

According to the question bank,A is correct. When using the fair value model of revaluing assets, all increases and decreases in the investment prices affect net income.

Can anyone please explain?

I cant believe I dont clearly remember these concepts considering I passed the level 1 this June :slight_smile: But as far as I remember, I agree with you that the 10 million should be deducted from surplus and 2 million should be reported as loss in income statement due the fact that the asset’s value dropped under the historical cost.

There is a difference between the revaluation model and fair value model. Under IFRS, this property is classified as investment property. The fair value model for investment property charges all gains and losses directly to net income. What you’re describing is the revaluation model for non-investment property. Investment property is property owned to earn rental income and/or capital gains on.

Thank you Moonborne. I read the question really fast and I missed the word “investment property” and answered as if it was “property”. What you are saying is the correct answer