Question

International Financial Reporting Standards (IFRS) does not use historical cost. As we discussed in Chapter 6, historical cost is the original monetary value of an item. For an example, if land was originally purchased one hundred years ago for $50,000, then that land would still be on the books for $50,000. Most importantly this cost is concrete and documented. Instead, IFRS revalues items at their current market value and the capital assets are marked up or down.

1. What is the impact on the Income Statement and Balance Sheet from the IFRS revaluation method?
2. What challenges do you see US company managers having as it relates to the revaluation?
3. What other significant challenges do you see?

Answer 1

Periodic revaluation of assets' carrying value and adjusted suitably to reflect the market value. This option is available in the IFRS. According to this,

• If the revaluation Increases the carrying value of the asset ie upward revaluation, then the asset will be presented at revalued amount and the increase due to revaluation will be presented in the Other Comprehensive Income understeer title of Revaluation Surplus which later will be presented under equity.
• If the revaluation decreases the value of the asset ie downward revaluation, the asset will revalued to that value and the amount of decrease will be charged to Profit and Loss. However, if there are any surplus from revaluation pertaining to that asset previously made, then the loss will be first charged to reduce such surplus and balance if any, will be charged to profit and loss.

The challenges faced by the managers while revaluation of assets are:

• Scarcity in the available information: Manager's may often find it difficult to make accurate valuation decisions due to lack of information availability.  
• Revaluation of certain intangible assets becomes really difficult when there are no comparables are readily available.
• Rate of discount used for discounting cashflows from asset may be different from the company's Rate of Return. Choosing discount rates will be real challenge for the managers.

Other challenges are:

• Business' may often use revaluation as tool to manipulate and wrongly present the value of fixed assets.
• Auditors may have to resort to external valuers and actuaries otp verify the valuation and thus is more challenging task.