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Subject 4. The Revaluation Model PDF Download
Under U.S. accounting standards, it is compulsory to account for impairment in long-lived assets (downward revaluation). However, upward revaluation of long-lived assets to reflect fair market values is not allowed.

The balance sheet is more informative when assets and liabilities are stated at market value rather than historical cost. IASB and some other non-U.S. GAAP do permit upward revaluations. The purpose of a revaluation is to bring into the books the fair market value of long-lived assets.

  • If an asset revaluation initially decreases the asset's carrying value, the decrease is recognized as a loss. Later, if there is an increase in the carrying value, the increase is recognized as a profit (up to the amount of the original decrease).
  • If an asset revaluation initially increases its carrying value, the increase bypasses the income statement and goes to equity (revaluation surplus). Later, if there is a decrease, it first decreases the revaluation surplus, then goes to income.

Financial Statement Analysis Considerations

  • The leverage motivation. An upward revaluation may improve a firm's leverage.
  • Income manipulation. Revaluations are subjective in nature. For example, a downward revaluation will reduce ROE in the current period but make the firm more profitable in future years, since total assets and shareholders' equity will be lower.
  • Revaluation has no impact on cash flows.
  • What is the true value of the firm's long-lived assets? Why is the revaluation necessary? Who does the appraisal? How often is it done?

Learning Outcome Statements

describe the revaluation model;

CFA® 2023 Level I Curriculum, Volume 3, Module 23

User Contributed Comments 13

User Comment
Khadria If the income is changed, then the income taxes are changes and hence the CFO is chnaged. Is it so?
markhuang No, Khadria. Changing the depreciatiopn/amortization does not change income tax paid unless IRS has the same requirement as GAAP.
AppleGi Do assets revaluations initially decrease ROE and ROA regardless of whether thy initially increase or decrease the carrying value?
gill15 If there is a downward revaluation, A decrease. How does this cause a decrease in ROE?
teje a downward revaluation will result in a loss which flows to the income statement (unless there was any credit in the revaluation surplus account in equity). This loss reduces net income; The percentage decrease in net income is greater than the decrease in shareholders' equity, thereby resulting in lower ROE.
johntan1979 Revaluation of long-lived assets sounds like inventory write down to me
CHUCKYT Khadria, I have the same question and I dont think Markhuang answered it correctly. Where on the income statement is the revaluation loss charged? I dont think it is charged under depreciation although depreciation will be changed going forward. If the loss reduces net income, that would be a change to income taxes.
And cash flow would be changed.
cbracho54 Khadira and Chuckyt,
Depreciation/amortization are non cash expenses that will not hit Cash Flow Statements (even for tax purposes, because tax rules for depreciation are very different from tax rules for reporting) research MACRS to find more about depreciation for tax purposes. Therefore, on any cash flow statements, the depreciation/amortization will be added back.
michaeloa3 cbracho54: I think you are right the expense itself gets added back to Cash Flow, but the result of the expense causes a lower tax burden, which alters the Cash Flow? Any one else have clarification?
farhan92 guys the textbook explains this pretty well - takes about 4 and a half minutes to go over it.
namuhama CHUCKYT, revaluation surplus should be assigned to statement of comprehensive income, not to the income statement, as part of other comprehensive income.
Streberli why does upwards revaluation increase leverage? It says upward revaluation above the carrying value goes into EQUITY (revaluation surplus) and if equity increases leverage should decrease right?
breh @Streberli: it says "improve" leverage, not "increase" leverage. They are exactly opposite. The notes is correct.
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