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.

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.