After initial recognition, IFRS and Ind AS let an entity choose, class by class, between the cost model you already know and the revaluation model. US GAAP offers no such choice for property, plant and equipment, where cost is a ceiling and upward revaluation is prohibited outright.
That single difference is the largest remaining source of non-comparability in the fixed-asset section of a balance sheet.
How does the revaluation model work?
Under the revaluation model an asset whose fair value can be measured reliably is carried at fair value at the date of revaluation less subsequent accumulated depreciation and impairment. Five mechanical rules govern it, and getting the routing right is most of the examinable content.
- Frequency. Revaluations must be regular enough that carrying amount does not differ materially from fair value. Volatile classes may need annual revaluation and stable ones every three to five years. A company that revalued once in 2011 and has not looked since is not applying the model.
- The whole class moves together. Revaluing the profitable half of a property portfolio and leaving the rest at cost is selective, and it destroys comparability inside a single line.
- An increase goes to other comprehensive income and accumulates in equity as a revaluation surplus, except to the extent that it reverses a decrease of the same asset previously recognised in profit or loss, in which case it goes to profit first.
- A decrease goes to profit or loss, except to the extent that a credit balance exists in the revaluation surplus for that same asset, in which case it goes to other comprehensive income first and reduces that surplus.
- Depreciation resets after every revaluation, over the remaining useful life from that date, so the charge steps up after a write-up and steps down after a write-down.
Those two exceptions make the model asymmetric in practice, and they explain why Sahyadri's two write-downs behave so differently. The surplus is tracked asset by asset, never in aggregate, so a spare credit balance on the Nagpur warehouse cannot absorb a write-down on the Coimbatore office.
The depreciation reset is the rule that surprises people who have only ever seen the cost model. In Worked Example 2 the charge goes ₹30,00,000, ₹35,00,000, ₹30,00,000, ₹25,00,000 and then ₹35,00,000 across five years, on a single building nobody touched.
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How is a revalued asset presented and taxed?
Two presentation choices exist for the accumulated depreciation on the revaluation date, and both give the same net figure. Under the elimination method accumulated depreciation is written off against the gross carrying amount and the asset is presented at the revalued amount with a nil accumulated balance. Under proportionate restatement the gross carrying amount and the accumulated depreciation are both scaled by the ratio of new to old net carrying amount. For Sahyadri's first revaluation that ratio is 1.166667, which restates the gross block to ₹7,00,00,000 and accumulated depreciation to ₹35,00,000, netting to the same ₹6,65,00,000. The choice matters only if you compute average asset age from the gross block, and if you do, it matters a great deal.
Two further rules complete the picture. The surplus may be transferred to retained earnings as the asset is used, at the rate of the excess depreciation each year, or in one movement on disposal. That transfer is a movement within equity and it never passes through profit.
Deferred tax attaches to the revaluation, because the tax base does not change. At an illustrative twenty-five percent rate, Sahyadri's ₹95,00,000 surplus carries a deferred tax liability of ₹23,75,000, leaving ₹71,25,000 in equity. Indian corporate tax rates change with the Finance Act, so verify the rate applicable to the entity and the year before using it.
What revaluation does to the ratio panel
A revaluation raises the asset and raises equity by the same amount, and then it raises depreciation for the rest of the asset's life. Both effects push return ratios down, and neither reflects anything the business did.
Take Sahyadri's second year. Under the revaluation model it opens with ₹15,65,00,000 of assets and ₹11,95,00,000 of equity, charges ₹35,00,000 of depreciation and earns ₹85,00,000. Under the cost model it would open with ₹14,70,00,000 of assets and ₹11,00,00,000 of equity, charge ₹30,00,000 and earn ₹90,00,000.
| Measure, year 2 | Revaluation model | Cost model | Gap |
|---|---|---|---|
| Profit | ₹85,00,000 | ₹90,00,000 | ₹5,00,000 |
| Opening assets | ₹15,65,00,000 | ₹14,70,00,000 | ₹95,00,000 |
| Opening equity | ₹11,95,00,000 | ₹11,00,00,000 | ₹95,00,000 |
| Return on assets | 5.4313% | 6.1224% | 69.11 bp |
| Return on equity | 7.1130% | 8.1818% | 106.88 bp |
Same building, same rent roll, same textile business. A hundred and seven basis points of return on equity turned on a policy election.
How do you adjust ratios for a revaluation?
The comparability adjustment takes three moves, and it ties out to the rupee. Add the excess depreciation back to profit, which is the revalued charge less what the cost model would have charged. Subtract the revaluation surplus from assets. Subtract the same surplus from equity. For Sahyadri, profit becomes ₹85,00,000 plus ₹5,00,000, or ₹90,00,000. Assets become ₹15,65,00,000 less ₹95,00,000, or ₹14,70,00,000. Equity becomes ₹11,95,00,000 less ₹95,00,000, or ₹11,00,00,000. All three land on the cost-model figures, and that's your check that the adjustment was done right.
Run the adjustment in the direction that gives you the larger comparable set. Since no US filer can revalue, converting the IFRS revaluer down to cost is almost always the right way round, and the disclosure you need is present: the standard requires the carrying amount that would have been recognised under the cost model. You'll find it in the property, plant and equipment note. It's one of the most under-read lines in an annual report.
What are the limits of the adjustment?
The adjustment has three limits, and you should know them. It uses the surplus balance, so it silently misses the part of a historical write-up already transferred to retained earnings. It cannot separate a revaluation from an acquisition-date fair value step-up, which is a different mechanism producing a similar distortion. And undoing the revaluation makes the ratio comparable while making it less informative about the capital actually tied up in the business. That's a real cost, and it's why you report both numbers.