Distinguish between cost and fair value measurement for PPE under IAS 16 and discuss implications for depreciation.

Distinguish between cost and fair value measurement for PPE under IAS 16 and discuss implications for depreciation.

• A. Cost model uses fair value with periodic revaluations; depreciation is based on revalued amounts.
• B. Revaluation model uses cost less depreciation and impairment; cost model uses fair value.
• C. Cost model uses cost less depreciation and impairment; revaluation model uses fair value with periodic revaluations; effects include a revaluation surplus in equity and adjusted depreciation.
• D. Both models use cost; no revaluation surplus arises.

Answer: (D)

Two measurement bases exist for Property, Plant and Equipment under IAS 16: the cost model and the revaluation (fair value) model. Under the cost model, an asset is carried at its cost less accumulated depreciation and impairment. Depreciation is charged on the depreciable amount derived from that cost. Under the revaluation model, the asset is carried at a revalued amount, typically the asset’s fair value at the date of revaluation, with subsequent depreciation charged on this new amount and impairment recognized as needed. Revaluations must be infrequent enough to ensure the carrying amount remains close to fair value, but they must occur regularly enough to prevent material divergence. When a revaluation increases the carrying amount, the increase goes to equity as a revaluation surplus (unless it reverses a prior decrease recognized in profit or loss). Depreciation after a revaluation is based on the revalued amount, not the original cost. Conversely, a revaluation decrease is generally charged to profit or loss, except to the extent it reverses a previous surplus recognized in equity for that asset. This combination explains why the correct statement reflects that the cost model uses cost less depreciation and impairment, the revaluation model uses fair value with periodic revaluations, and the effects include a revaluation surplus in equity and depreciation adjusted to the new amount.

Two measurement bases exist for Property, Plant and Equipment under IAS 16: the cost model and the revaluation (fair value) model. Under the cost model, an asset is carried at its cost less accumulated depreciation and impairment. Depreciation is charged on the depreciable amount derived from that cost. Under the revaluation model, the asset is carried at a revalued amount, typically the asset’s fair value at the date of revaluation, with subsequent depreciation charged on this new amount and impairment recognized as needed. Revaluations must be infrequent enough to ensure the carrying amount remains close to fair value, but they must occur regularly enough to prevent material divergence. When a revaluation increases the carrying amount, the increase goes to equity as a revaluation surplus (unless it reverses a prior decrease recognized in profit or loss). Depreciation after a revaluation is based on the revalued amount, not the original cost. Conversely, a revaluation decrease is generally charged to profit or loss, except to the extent it reverses a previous surplus recognized in equity for that asset. This combination explains why the correct statement reflects that the cost model uses cost less depreciation and impairment, the revaluation model uses fair value with periodic revaluations, and the effects include a revaluation surplus in equity and depreciation adjusted to the new amount.