Under which model is a fixed asset revaluation permitted, and how does it affect depreciation?

Under which model is a fixed asset revaluation permitted, and how does it affect depreciation?

• A. Cost model; depreciation unchanged
• B. Revaluation model; increases go to a revaluation surplus in equity (to the extent of previous decreases); depreciation is based on the new carrying amount
• C. Fair value model; depreciation eliminated
• D. Historic cost model; depreciation increases

Answer: (B)

The key idea is that fixed assets can be carried under a revaluation model, which allows the asset’s carrying amount to be updated to a higher (fair) value when revalued. When that happens, the increase is not taken through the profit and loss statement. Instead, it goes into a revaluation surplus within equity, but only up to the amount of any previous declines that were recognized in profit or loss for that asset. If the upward movement exceeds those previous declines, the excess increases the revaluation surplus. Depreciation, from that point on, is based on the new carrying amount, over the asset’s remaining useful life, reflecting the higher base.

The key idea is that fixed assets can be carried under a revaluation model, which allows the asset’s carrying amount to be updated to a higher (fair) value when revalued. When that happens, the increase is not taken through the profit and loss statement. Instead, it goes into a revaluation surplus within equity, but only up to the amount of any previous declines that were recognized in profit or loss for that asset. If the upward movement exceeds those previous declines, the excess increases the revaluation surplus. Depreciation, from that point on, is based on the new carrying amount, over the asset’s remaining useful life, reflecting the higher base.