An IFRS revaluation is an adjustment where a company must change or alter the value of a fixed asset for a specific purpose. The most common revaluations focus on a company’s property, plant, or equipment, which all fall under the large group of fixed assets. An IFRS revaluation changes the asset’s historical cost value — which is most likely how the company recorded the asset in the ledger — to a fair market value. The purpose of such an adjustment is to present accounting information in the most accurate manner possible. When a market does not exist for a specific fixed asset, an accountant may need to make an estimate of an asset’s value.
IFRS typically requires a fixed asset recorded at historical cost, which is the price a company paid for the item. A few extra costs may also be in this account, such as freight or shipping costs, installation fees, and costs for testing the equipment. The problem with this accounting theory is that the historical cost is not the market value for the fixed asset. For example, the asset may increase or decrease in terms of market value over time. Therefore, a company’s balance sheet may be under or overstated at some point in time, skewing the actual financial health of a company.
Under certain conditions, a company may need to make an IFRS revaluation on specific fixed assets. The revaluation model under IFRS has specific guidelines a company must follow; it may be best for a company to consult a licensed IFRS accountant in order to know the rules that apply in a given situation. In most cases, the company needs to find a market where similar assets are bought and sold under free market principles. Accountants must be very careful when selecting these markets for an IFRS revaluation and the possible prices for similar assets. In some cases, this market does not exist for specialized assets.
If an IFRS revaluation results in a decrease for a fixed asset’s value, the company most likely needs to make an adjustment that results in a loss on the books. The loss reduces the asset’s value on the balance sheet and most likely results in a loss against net income. A gain in the asset’s value may work in a similar manner, where the balance sheet value increases, and a gain goes against the company’s net income for the corresponding period. Other technical issues may present themselves due to the potential complexity for these accounting standards.