Accounting and Auditing – Revaluing fixed asset property

Knowing the rules allows you to plan.  As auditors we need to be sure you have applied the standards correctly.

Remember that if the property is held for rental income or held for capital appreciation it may well need to be considered an Investment Property.  As long as the property can be reliably valued than the property should be fair valued.

This document discusses the options and obligations that companies have in regards to revaluing fixed asset property.

FRS105

Under FRS 105 fixed assets must be measured at cost, less any accumulated depreciation and impairment losses.  Revaluation model (fair value accounting) is not allowed under FRS 105.    Any upward or downward valuation changes (gains/losses) cannot be recognised in the financial statements. Fixed assets must remain at historical cost.

FRS102 1A, FRS102 and IFRS

Under the remaining applicable standards the treatment is similar:

  1. Choice of Measurement Model
    • Small entities can choose between:
      a) Cost Model – Assets are carried at cost, less depreciation and impairment.
      b) Revaluation Model – Assets are revalued to fair value.
  2. Where to Record Revaluation Gains/Losses
    • Gains: Revaluation increases are taken to a Revaluation Reserve (equity) unless reversing a previous impairment.
    • Losses: Revaluation decreases are charged to profit and loss, unless they offset previous revaluation gains.
  3. Consistency
    • If one asset in a class is revalued, all assets in that class must be revalued (e.g., all buildings if you revalue one building).
  4. Disclosure Requirements
    • Accounting policies and material information about the revalued assets.
    • Disclosure and analysis required.

As an aside some companies may look to decouple the land from the building and will depreciate the buildings at cost; and revalue the land at fair value.

When Should a Revaluation Be Considered?

Revaluing fixed asset property is not always mandatory, but it becomes important when the carrying amount of a property materially differs from its fair value. This situation often arises due to significant changes in the property market, economic conditions, or the nature of the property itself. For example, if the area around a commercial property has undergone rapid development, or if planning permissions have changed, the fair value of that asset may no longer reflect its original recorded cost. Revaluation may also be considered following recent sales or purchases of similar properties, or after substantial improvements have been made to the asset. Some companies implement a policy of regular revaluation every few years to ensure their accounts remain accurate and aligned with fair value. It’s critical to understand that when a business opts for the revaluation model, this approach must be applied consistently across the entire class of assets to which the revalued item belongs. For instance, if one building is revalued, then all other buildings in the same class must also be reassessed to maintain consistency and meet accounting standards.

Practical Considerations for Revaluation and Audit

When a company decides to adopt the revaluation model, it brings a number of practical implications, both in accounting treatment and audit procedures. One of the most important aspects is the need for a reliable and professional valuation. Auditors typically expect to see evidence from a qualified valuer, rather than relying solely on internal estimates or director assumptions. This independent valuation forms a key part of the audit evidence supporting the fair value stated in the financial statements. In addition to the accounting impact, companies must also consider potential tax implications. While revaluation gains usually do not affect immediate taxable profits, they can give rise to deferred tax liabilities or capital gains tax upon disposal of the asset, depending on the circumstances. Accurate recordkeeping becomes essential, not just for accounting compliance but also to satisfy audit requirements. All changes, including the date and basis of revaluation, methods used, and resulting adjustments, should be clearly documented. Effective communication with auditors early in the process can help clarify expectations, avoid misunderstandings, and ensure that any supporting evidence required—such as title deeds, valuation reports, or impairment assessments—is ready when needed. By approaching the process methodically, companies can maintain compliance and avoid common audit issues.

Audit evidence

As auditors we are likely to be interested in:

  • Evidence of ownership – ie title deeds; completion statements
  • Evidence of valuation – ie a professional valuation
  • Evidence that depreciation and impairment have been considered.