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Hello everyone,
As the topic title says, I really couldn’t find out the difference between Revaluation Model (of course revaluation downward) in IAS16 and Impairment of Assets in IAS36 (applied to PPE). The accounting treatment in these two are the same.
I already asked my lecturer this question and his reply was “Revaluation Model uses Revalued Amount to compare with Carrying Value and Impairment Test uses Recoverable Amount which is the higher of Fair Value less Costs to Sell and Value in Use”. And he said something like : in F7 context, Revalued Amount is the same as Fair Value but in practical, these two may be different in some cases.
Actually I still don’t feel satisfied to this answer yet. So could anyone please give me a more thorough explanation ? And if these two are really the same, why did the people at IASB give two names for the same thing, which is very confusing ?
Let’s say : I have an machine bought 2 years ago
– Original cost : $20,000
– Depreciation : $2000 a year
– 31/12/2015 Revalued Amount : $15,000
– 31/12/2015 Fair Value less cost to sell : $15,000
– 31/12/2015 Value In Use : $14,500So, do I impair or revalue the asset ?
If you are following the valuation model, you will revalue down to $15,000
If you are following cost model, you will impair down to $15,000
Your better question would be if value in use had been $15,500
Then you would impair down to $15,500
But then you should also ask yourself why the revalued amount of $15,000 is lower than the value in use of $15,500. Maybe you need to reconsider the basis upon which valuations are assessed!
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