How to Account for Revaluation Reserves Under IFRS

To account for revaluation reserves under IFRS, credit any upward revaluation of property, plant, and equipment to a revaluation surplus within equity through other comprehensive income, continue depreciating on the new carrying amount, recognize the related deferred tax in OCI as well, absorb later impairments against the surplus before touching profit or loss, and reclassify the balance to retained earnings either piecemeal over the asset’s life or in full when the asset is disposed of. The surplus never passes through profit or loss on its way to retained earnings. If you report under US GAAP rather than IFRS, none of this applies: US GAAP requires the historical cost model for PP&E and prohibits upward revaluation entirely.

Which Assets the Revaluation Model Covers

IAS 16’s revaluation model applies to tangible long-term assets: land, buildings, machinery, equipment, and similar items. The choice between the cost model and the revaluation model is an accounting policy applied to an entire class of assets, so you cannot revalue one building while leaving others at cost. If you revalue one, you revalue them all.¹

Intangible assets can also be revalued under IAS 38, but the asset must have a quoted price in an active market. That requirement rules out most intangibles. Patents, customer lists, and internally generated brands almost never qualify. Certain standardized intangibles such as taxi medallions or fishing quotas may meet the threshold, but these are exceptions. If no active market exists for a particular intangible within a revalued class, that asset stays at cost.²

Revaluations must occur with sufficient regularity so that the carrying amount does not drift materially from fair value at the reporting date. Volatile assets, such as commercial property in a fast-moving market, may need annual revaluation; assets whose values change modestly can go three to five years between revaluations.¹

Recording the Upward Revaluation

When fair value exceeds the current carrying amount, you adjust both the asset account and accumulated depreciation. IAS 16 permits two methods.

The Elimination Method

This is the simpler and more widely used approach. Accumulated depreciation is eliminated against the gross carrying amount, and the asset is then restated to its new fair value.¹

Suppose a building was purchased for $2,000,000 with accumulated depreciation of $400,000, giving a carrying amount of $1,600,000. An independent valuation determines fair value is $2,200,000. Under the elimination method, you wipe out the $400,000 accumulated depreciation against the gross asset balance, then restate the building to $2,200,000. The net $600,000 increase is credited to the revaluation surplus:

Debit Accumulated Depreciation $400,000 / Credit Building $400,000 (eliminate depreciation)
Debit Building $1,000,000 / Credit Revaluation Surplus $600,000 (restate to fair value; the net movement in the building account produces the $600,000 surplus)

The Proportional Restatement Method

Under this approach, both the gross carrying amount and accumulated depreciation are scaled proportionally so the net carrying amount equals the new fair value. Using the same numbers, the ratio of new fair value to old carrying amount is 1.375 ($2,200,000 / $1,600,000). Apply that to both figures: the gross amount becomes $2,750,000 and accumulated depreciation becomes $550,000, still netting to $2,200,000.³ The $600,000 increase in carrying amount still goes to the revaluation surplus. This method preserves the depreciation history, which some entities prefer for internal tracking.

When a Prior Downward Revaluation Exists

If the asset was previously revalued downward and that decrease hit profit or loss, the current upward revaluation does not go entirely to the surplus. The gain first reverses the previous loss through the income statement, dollar for dollar, until the old loss is fully recovered. Only the amount exceeding that prior loss gets credited to the revaluation surplus.¹

Depreciation After Revaluation

After revaluation, depreciation is calculated on the new, higher carrying amount over the asset’s remaining useful life. The annual charge will be larger than before.

Using the building: before revaluation, depreciation on the $2,000,000 cost over 50 years was $20,000 annually (assuming a depreciable amount of $1,000,000). After revaluation to $2,200,000 with 45 years remaining and a revised depreciable amount of $1,350,000, the annual charge rises to $30,000. That extra $10,000 per year reduces reported profit, so the unrealized gain is being partially consumed through the asset’s use.

The revaluation is also a natural point to reassess useful life, residual value, and depreciation method. IAS 16 expects these estimates to be reviewed at least at each financial year-end, and valuers often surface information that prompts adjustments.

Deferred Tax on the Revaluation Surplus

This is the step most frequently missed. Tax authorities do not recognize the upward revaluation. The asset’s tax base stays at original cost. The gap between the higher carrying amount and the unchanged tax base is a taxable temporary difference under IAS 12, and you must recognize a deferred tax liability.⁴

Because the revaluation gain itself is recognized in OCI, the related deferred tax is also recognized in OCI, not in profit or loss. The revaluation surplus shown in equity is the gross surplus net of the deferred tax liability attributable to it.

This carries through to the piecemeal transfer as well. When excess depreciation is transferred from the surplus to retained earnings each year, the related deferred tax on that portion transfers with it. Using the IAS 12 illustrative figures, if excess depreciation for the year is $1,590 and the applicable deferred tax is $557, the net transfer to retained earnings is $1,033.⁴ Ignoring the deferred tax component overstates the amount reaching retained earnings and can distort dividend capacity calculations.

Impairment of a Revalued Asset

A revalued asset remains subject to impairment testing under IAS 36. If at any reporting date indicators suggest recoverable amount has fallen below carrying amount, test for impairment.⁵

The decrease is first recognized in OCI to the extent it can be absorbed by the asset’s existing revaluation surplus. Any excess goes straight to profit or loss.¹ The reserve absorbs losses on the way down just as it captured gains on the way up.

Impairment losses can be reversed in later periods, but only based on a genuine change in the estimates used to measure recoverable amount, not simply the passage of time. For revalued assets, a reversal goes to profit or loss only to the extent of any prior loss recognized there. Any additional recovery is treated as a revaluation increase and flows to OCI.⁵ Goodwill impairment, by contrast, can never be reversed.

Moving the Reserve to Retained Earnings

The revaluation surplus eventually reaches retained earnings through one of two routes. Both are strictly equity reclassifications; no amount passes through profit or loss.

Transfer on Disposal

When a revalued asset is sold, retired, or otherwise removed from the books, the entire remaining revaluation surplus for that asset transfers directly to retained earnings.¹ Any gain or loss on the sale itself, measured as the difference between proceeds and the revalued carrying amount, is recognized separately in profit or loss.

Piecemeal Transfer During the Asset’s Life

IAS 16 permits, but does not require, a gradual annual transfer equal to the excess depreciation. That is the difference between depreciation based on the revalued amount and the depreciation that would have been charged on original cost.¹

In the building example, depreciation on the revalued amount is $30,000 per year, while depreciation on the original cost would have been $20,000. The $10,000 difference can transfer from the surplus to retained earnings each year, neutralizing the higher depreciation’s drag on retained earnings. Remember to transfer net of the related deferred tax. By the time the asset is fully depreciated or sold, the entire revaluation surplus will have migrated to retained earnings one way or the other.

Whether that balance in retained earnings is actually distributable to shareholders depends on local corporate law, not IFRS. IAS 16 requires disclosure of any restrictions on distributing the surplus, which implicitly acknowledges that many jurisdictions treat the reserve as non-distributable until realized.¹

Required Disclosures

When PP&E is carried at revalued amounts, IAS 16 requires the following beyond the usual disclosures:¹

The effective date of the most recent revaluation.
Whether an independent valuer was involved.
For each revalued class, the carrying amount that would have been reported had the assets remained at cost.
The revaluation surplus balance, its movement during the period, and any restrictions on distributing it to shareholders.
A roll-forward of carrying amounts by class, showing opening balance, additions, revaluation increases or decreases, impairment, depreciation, disposals, and closing balance.

The cost-model comparison lets readers see how much of the reported asset value rests on appraisal judgment rather than transaction price, so it should be prepared and presented alongside the revaluation surplus disclosures each reporting period.

1
IFRS Foundation. IAS 16 Property, Plant and Equipment
2
IAS Plus. IAS 38 Intangible Assets
3
IFRS Foundation. IAS 16 and IAS 38 — Revaluation Method — Proportionate Restatement of Accumulated Depreciation
4
IFRS Foundation. IAS 12 Income Taxes Illustrative Examples
5
IFRS Foundation. IAS 36 Impairment of Assets