Questions on impairment charges for long lived assets

Dear all,

I understand from Schweser Notes that under Revaluation Model (IFRS); a loss will be recongised (when fair value is below historical cost) in the income statement.

Question: If this loss also called impairments? I am rather confused as there is another seperate session in the book that discuss impairments under both IFRS and U.S. GAAP.

Thanks for the valuable inputs! :slight_smile:



Thanks Pompey for the differentation!

So in the scenario where a company need to account for both impairment charges as well as loss from revaluation; how will the items be reported in the income statement?

  1. Loss due to revaluation to fair value below historical cost
  2. Impairment charges

Thanks again:)

The revaluation stuff is only related to IFRS. GAAP does not allow revaluations except for Held for sale Assets.

Now to the real question, for example, the carrying value (value on the balance sheet) of an asset is $100, you revalue the asset and found the fair value of the asset to be $120. Now this $20 will go directly in the Shareholder’s Equity (in Other Comprehensive Income) as Revaluation Surplus and not in Income Statement. Now suppose you found that the value dropped to $110, this $10 will be reduced directly from the Revaluation Surplus and will not be recognized as an Impairment loss in Income Statement. Had the value dropped to $70 from $120. The $20 will be reduced from Revaluation Surplus and the $30 will be recognized as an Impairment loss in Income Statement.

Losses due to decrease in value below Carrying value are recognized in Income Statement.

Losses due to decrease in Revalued amount reduce Revaluation Surplus (Shareholder’s Equity).

I hope this helps.

Hello Pompey,

I took a 2nd read at your explanation today. Your explanation is correct just that I wish to add on 1 more point; particularly on the line of text I bolded.

I guess I was reading too fast and ended up confused between impairment and revaluation. Anyway, for cost model there is a need to test for impairment (both IFRS and U.S. GAAP) whereas for IFRS-reporting companies who use the Revaluation Model need not; but having said that they still need to recongise loss if fair value fall below historical cost and; recongise gain thereafter should there is a rise of fair value. In addition, if at the start fair value is above historical cost; then the gain is recongised under Revaluation Surplus (a component of Owners’ Equity) instead of gain in income statement.


It certainly helps a lot, Finkid; appreciate your help and explanation a lot:)

Just to check with you, I understand from the notes that for Revaluation Model- we compare fair value to historical cost ; but you mentioned comparing fair value to carrying value (i.e. Net Book Value) of the asset. Can you explain further? Thanks.

For impairment loss calculations, you compare the fair value with the carrying value and not with historical value. (Under IFRS)

Think about it intuitively. For example, you purchased a car for $20,000 and you decide to depreciate it over 5 years using the straight line method with zero residual value. The depreciation expense for each year will be $4000. Now, after 3 years the carrying value of the car will be $8000. Suppose you find out that you would be able to sell your car for $10,000. Now, you will recognize a gain of $2000 ($10,000 FV - $8000 CV) and this will go in Shareholder’s Equity as Revaluation Surplus and not in Income Statement.

Now, decide wether you are going to compare fair value ($10,000) with carrying value ($8000) or historical cost ($20,000). Hint: Who would pay you $20,000 for your 3 year old used car?

Following definitions might make it more clear.

Fair value: you can think of it as market value. Carrying value: Historical cost less depreciation/amortization expense and impairment losses Historical cost: Original price you paid at the time of purchase (some costs such as transportation cost, installation cost etc. are also included in this)

This was a good thread to look through.

One related question: what’s the difference between “revaluation model” and “fair value model”?

Moosey, the fair value model applies to investment property only, that is property which is being rented (and therefore a source of rental income) out or is simply held for capital appreciation, or both.

Under the fair value model, the property is of course reported at fair value in the balance sheet with all changes to that value going directly to income (both gains and losses).

The revaluation model applies to long-lived assets other than investment property, that is property, plant and equipment )PPE) and theoretically, it may also be applied to intangible assets. In practice, it is mainly used for limited classes of PPE: land and buildings, which may see their market/fair value rise.

Under the revaluation model, the asset is also reported at fair value in the balance sheet, but that fair value is subsequently depreciated and also subject to impairment testing. The treatment of a revaluation gain or loss is different than that described for the fair value model. In most cases it does not go to the income statement, but directly to revaluation surplus in equity and shows up in a section of the financial statements called Other Comprehensive Income.

In my home market (Poland), there is a nice little company which applies the revaluation model under IFRS for some of its PPE and also holds investment property for which it applies the fair value model. If anyone is interested in a live example of this let me know and I will show you more.

Thanks so much Wojtek, it’s clear now.