Under U.S. GAAP, upward revaluations of long-lived assets are not permitted. However, IFRS gives firms the option to revalue upward both intangible and tangible longlived assets.19 Firms must choose the class of asset to which revaluations will apply and then perform the revaluations on a regular basis. The choice is irrevocable, and the fair value of nonfinancial assets in active markets is difficult to obtain. The significant cost associated with obtaining reliable measurements often exceeds the benefits of presenting a relevant asset valuation on the balance sheet. The fact that many firms choose not to exercise the upward revaluation option is a testimony to the time and effort required for its implementation
When fair value remains above original acquisition cost, upward and downward revaluations are reported as other comprehensive income and are accumulated in the shareholders’ equity section of the balance sheet. The account typically used in the other comprehensive income classification is ‘‘Revaluation Surplus.’’ If fair value is less than or equal to cost, reversals of previous downward revaluations (that were reported as losses on the income statement) are treated as gains on the income statement. To illustrate the IFRS treatment, assume that a French company following IFRS has vineyard land originally costing E2,000,000. At the next four year-ends, the land is worth the following
When fair value remains above original acquisition cost, upward and downward revaluations are reported as other comprehensive income and are accumulated in the shareholders’ equity section of the balance sheet. The account typically used in the other comprehensive income classification is ‘‘Revaluation Surplus.’’ If fair value is less than or equal to cost, reversals of previous downward revaluations (that were reported as losses on the income statement) are treated as gains on the income statement. To illustrate the IFRS treatment, assume that a French company following IFRS has vineyard land originally costing E2,000,000. At the next four year-ends, the land is worth the following
Exhibit 8.4 shows the effects of upward and downward revaluations of the asset. Fair value increases above original acquisition cost in 2013, causing an upward revaluation of the land and an increase in comprehensive income (OCI) but not net income. The increase is recognized in accumulated other comprehensive income in the shareholders’ equity section. In 2014, the land is revalued downward, causing a partial reversal in the accumulated unrealized gains. Such reversals of previously unrealized gains are reported as losses in other comprehensive income and reduce accumulated other comprehensive income on the balance sheet as long as fair value is greater than original acquisition cost.
In 2015, fair value falls below original acquisition cost, causing a reversal of the remainder of the accumulated unrealized gains in accumulated other comprehensive income via the recognition in other comprehensive income of E300,000unrealized loss and recognition in net income of E100,000 unrealized loss. The land recovers its value in 2016, and the reversal of the 2015 unrealized loss reported in net income is reported in 2016 net income as an unrealized gain
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