Once an entity has recognized an item of property plant and equipment as an asset in its books, the entity can choose between the two models( or methods) to account for the assets in the subsequent measurement period(s), that is the period(s) after the asset has been acquired and before its deposition. The models are the cost model and revaluation model. The entity shall apply the model to the entire class of property, plant and equipment to which that asset is of similar nature and use in the entity’s operations.
The following are differences between the cost model and revaluation model of measuring property, plant and equipment:
- According to IAS 15 property plant and equipment all purchase items of property plant and equipment are initially recognized at cost, after this an entity may choose to apply the cost model (where PPE is carried at cost less accumulated depreciation less accumulated impairment loss) or revaluation model (where PPE is valued at revalued amount less subsequent accumulated depreciation less subsequent accumulated impairment loss);
- If the revaluation model is used the entire class of PPE to which that asset belongs must be revalued. the frequency of revaluation depends on movement in the fair value of item being revalued, but where there are significant movement in fair value, annual revaluation may be required.
- The cost model is more objective as cost is definite but is providing outdated information. The revaluation model could be considered more subjective as it relies on expert valuer to provide reliable measures of fair value. These measures will be more up to date but may lead to large revaluation gains and loss in event of booming property markets followed by crush. The cost model is cheaper to apply as no expert opinion is required.
- Allowing two models leads to lack of comparability across reporting entities, not just in the statement of financial position but also in the statement of profit and loss as depreciation charges will be adjusted for revaluation.