There may be a misperception that International Financial Reporting Standards (IFRS) is just about Fair Value (FV). There are indeed options under IFRS that may allow you to use FV – these options might provide opportunities to reflect more current values in financial statements, but also come with costs of undertaking valuations and tracking changes in value. Careful accounting policy choices are required.
First, please understand that there is a difference in IFRS between the Fair Value Model and the Revaluation Model. The Revaluation model pertains to Property Plant & Equipment (PP&E) under IAS 16, whereas the Fair Value Model pertains to Investment Property under IAS 40 and is discussed elsewhere on the GFS Consulting web-site.
IFRS – PP&E Revaluation Method
Under Canadian GAAP, you do not re-measure PP&E at Fair Value. PP&E is only measured at FV if it is lower than the original cost of the asset, as a result of an impairment loss, which causes the FV to fall below cost.
Under IFRS, there is a choice to be made in accounting policy either at cost and depreciating, or accounting at fair value using Revaluation Model and depreciating. This choice is available on a class by class basis.
Example – suppose that a company has Land and Building that is used for a corporate head office and it is easier to re-measure at FV. This can be done, but IFRS rules require that all buildings used in the same manner in the entities operations must be also be accounted for at FV.
In the Revaluation model, any increase in FV does not go through the Income Statement. Instead, it is recognized directly in Balance Sheet Equity – Revaluation Surplus. Only if there is a decrease in FV, over and above any previous increases, does it go through the Income Statement as an expense item. Therefore, any revaluations that go below the original cost (what was originally paid) must go to the Income statement. Any revaluations that increase FV are recognized directly in Equity (Statement of Changes in Equity). Revaluations that decrease FV but remain above original cost are also recognized in Equity. The basic premise is that revaluations do not affect the Income Statement, but rather are recognized in Equity, unless the revaluation decreases an asset value below its original cost – in this situation it would affect the Income Statement as an expense item.
Impact to amortization (depreciation) – any revaluation that increases the asset value, also increases the amount of amortization that must be recognized in the Income Statement. Conversely, any revaluation that decreases an asset also decreases the amount of amortization that is required.
As can be seen, choosing the IFRS Revaluation model for PP&E will result in fairly complex accounting adjustments on an ongoing basis, and will likely result in higher volatility in reported net income.
I hope this helps. This is one of a series of blogs that is meant to convey information relating to Canada’s transition from Canadian GAAP to IFRS.
For further information, please refer to the ongoing series of IFRS blogs on the GFS Consulting web-site and please remember to contact your CGA or other accounting professional for further guidance.