CFAI:“Note that IFRS permit the reversal of impairment losses only. IFRS do not permit the revaluation to the recoverable amount if the recoverable amount exceeds the previous carrying amount.”
Elan:“Under IFRS, revaluations may take the value of an asset beyond its historical cost.”
I know that CFAI is probably the correct one but why would Elan have such contradicting information? Or is carrying amount and historical cost different?
EDIT: Does Elan mean that it would go to revaluation surplus instead of income?
I am also quite confused. Maybe the key issue here shall be : Is an “Impairment” a kind of “Revaluation” ?
The possible outcomes of a _ revaluation _ of a LLA are either the current (new) carrying amount is lower than its previous carrying amount or higher than its previous (old) carrying amount.
Repairment shall only refer to the case that the current (new) carrying amount is lower than its previous (old) carrying amount. But is it the case that the current (new) carrying amount is lower than its previous (old) carrying amount _ in a revaluation _ is equivalent to an “impairment” ?
On the other hand, does “revaluation” only refer to the case that the current (new) carrying amount is higher than its previous (old) carrying amount ?
CFAI’s statements shall refer to the “impairment” and Elan’s statements shall refer to the “revaulation”. Both statements shall be correct under IFRS.
The term of “revaluation” is used in “impairment” ( 8th line under 5.5 Reversal of Impairments of Long-Lived Assets on P.427 of CFAI text, Vol 3) too. However, the treatments with regard to the gain/loss of the LLAs are different between “impairment” and “revaluation”.
My further confusions :
What’s the difference between the definition of “impairment” and “revaluation” ?
Why the treatments with regard to the gain/loss of the LLAs are different between “impairment” and “revaluation” ?
Thank you for response ! I read your post on L2 forum. However, I still have a question.
If a company choose “Revaluation Model” for its land and building while the fair values of the these assets fluctuating over time, what would be treatmemts of the reversals of the values ?
Can the fair values of these assets be greater than their previous carrying values as they are treated according to the rules in revaluation model ? Or shall the assets be treated according to the rules in “impairment” (the reversals are limited to their previous carrying amount) ?
Sorry, let me clarify. My question isn’t so much as “what is the difference between impairment and revaluation”. I’m focusing on the revaluation part. Can you or can you not take the value of an asset and increase it beyond the carrying value?
So I’ve done more digging and the answer is yes. Under the revaluation model, if an asset is worth more than its carrying amount, you charge the difference to a revaluation surplus account, which is an “Other Comprehensive income” account (assuming you hadn’t deducted from net income in previous years). So why does the CFAI say " IFRS do not permit the revaluation…"
Would you please advise where did you find the CFAI’s statements ? The confusion shall be resulted from the fact that “impairment” actually is a kind of revaluation as their concepts are basically same, whereas their treatments of assets’ fair values which are greater than the previous carrying amount are completely different. That is, there is a discrepancy between them. This is why I am so confused !
I think a distinction has to be made between reporting PP&E using the cost model or the fair value model.
If the cost model is used, indeed, a firm cannot revaluate PP&E to the recoverable amount because it will exceed the carrying value.
If the fair value model is used, there are not restrictions on the revaluation of assets. Nonetheless, to report at fair value, there must be an active market for the asset.
Revaluations above the carrying value are reported in OCI.
Frederic9873, note that with regard to choosing the revaluation model for PP&E under IFRS, there is no condition that an active market exists for the asset. The active market condition does however apply to intangible assets, limiting significantly the types of intangibles for which the revaluation framework may be used (emission certificates, production quotas, etc.)
Please note under IFRS that “Fair Value ModeL” is only applicable to "Investment Property " and it is not applicable to “Assets Held for Use”.
Wojtek,
As the question raised by me in my previous post, under IFRS, which rule (revalation model or impairment) shall be followed If a company choose “Revaluation Model” for its LLAs and the fair values of its LLAs are fluctating over time ?
It seems to me that there is discrepancy and I am so much confused. Your comments are really appreciated !
sorry, I slightly struggle to undertsand the question here … companies reporting under IFRS have the choice of measuring LLAs under the classic historical approach or under the revaluation approach. In reality, the revaluation approach is only chosen for property (land and buildings) and often means that the company will be visited by a chartered surveyor/valuer, e.g. every 3 years to discover the new fair value of the revalued assets.
In between revaluation dates, the revalued assets are still subject to depreciation and may even suffer what would officially be termed mpairment. However, in the case of revalued assets, impairment has an effect which is identical to a downward revaluation, i.e. it impacts revaluation surplus within equity (via OCI) instead of hiting the Income Statement.
Assessing LLAs for impairment never stops. With revalued assets, impairment and downward revaluation have the same financial statements effect, so I wouldn’t really try too hard to differentiate between the two
Allpha, I assure you that the revaluation model does not replace any rules on impairment.
Impairment may also happen to revalued assets in between revaluation dates (although the way such impairment gets recognised is in essence identical to a downard revaluation).
Your impression that this is incosistent is probably due to the fact that what you are presented with in the Curriculum is just a summary of IFRS. In reality the rules on impairment are much more complex … for example, assets are almost never assessed for impairment on an individual basis but as part of asset collections, called Cash Generating Units. In reality, this changes the thinking quite a lot!
I strongly recommed that you don’t worry about this any more. Move on to something different. Some things need time to sink in or are never 100% clear unless you are willing to take the plunge and study the financial reporting rules straight from the source … i.e. from the IFRS book instead of the Curriculum
Thank you so much for your above advice and I will follow your advice. I failed last Dec, primarily because of Financial Reporting and Analysis, Fixed Income. That’s why I focus on these two parts this time.
