Asset Revaluation and Impairment: A Comparison of AASB Standards

This report provides a comprehensive analysis of asset valuation methods under AASB standards, specifically focusing on AASB 116 and AASB 136. It differentiates between asset revaluation and impairment losses, highlighting the circumstances under which each is applied and the accounting treatments involved. The report also contrasts the cost model with the revaluation model, detailing how assets are recorded, depreciated, and presented in financial statements under each method. It explores the implications of each model on financial reporting and provides insights into the advantages of the revaluation model for modern businesses, particularly those in growth stages. The report concludes by emphasizing the importance of accurately reflecting asset valuations to ensure informed decision-making and effective asset management.

Issue 1
AASB 116 suggests that a decrease in the carrying amount of an asset up to its fair value as a ‘revaluation decrement’. However, as
per AASB 116, a reduction in the value of an asset up to its recoverable amount is known as an ‘impairment losses’ of an asset. With
regards to revaluation of an asset, the requirements of AASB 136 are first required to be applied for an asset before the requirements
of AASB 116 are applied. Hence, the revaluation of an asset occurs on the basis of the changes in the market conditions related to the
asset. This may again change in the future when there is an upward revaluation of the asset and the amount of asset goes up again.
Whereas, the amount of impairment loss is permanent and the loss written off against an asset suggests that the amount from the
asset cannot be recovered again. As per AASB 1041, the amount of revaluation decrement must be recognised immediately and as an
expense in the Profit and Loss Statement. However, any amount remaining as a surplus in the balance sheet also needs to be written
off against the asset. In case of an impairment loss, the amount of loss needs to be checked on a timely basis when there are any
signs related to the impairment of an asset. These are then reduced from the asset according to the guidelines of AASB 136.

Issue 2
• The cost model is one where the asset is recorded at the amount for which it was purchased on the date of
acquisition. Any depreciation charged against the asset is transferred to the accumulated depreciation account.
This is adjusted against the asset when the overall useful life of the asset comes to an end. Until then, the asset
continues to be recorded at the cost in the books of accounts. This is in stark contrast to the revaluation model
where there is a constant reassessment of the fair value of the asset. The amount recorded at the end of the year
is the fair value of the asset. The revaluation of the asset is done on the basis of the conditions existing in the
market. In the Balance Sheet, the asset is recorded at cost in the year end. The amount of accumulated
depreciation is then deducted at the year end to show the written down value of the asset. Similarly, the amount of
depreciation is charged as an expense in the Income Statement. The changes caused to the amount of retained
earnings is shown as the difference in the statement of equity. In case of revaluation model, the changes occurring
in the fair value of the asset are adjusted in the statement of comprehensive income. These are then transferred to
the statement of equity. In the balance sheet, the assets are recorded at the amount of fair value. The cost model
is fairly easy to implement as it only requires the maintenance of records related to the asset. The revaluation