CFA Level I Exam · Analysis of Long-Term Assets

Revaluation Model vs Cost Model for Long-Term Assets

Updated 7 October 2026 · Fact-checked

Under IFRS, a company may carry property, plant and equipment at cost less depreciation (cost model) or at fair value less later depreciation (revaluation model). Revaluation increases usually go to OCI as a revaluation surplus in equity. Decreases go to profit or loss, unless they reverse an earlier surplus. Solve by tracking carrying amount, surplus and depreciation.

Understand Revaluation Model and Cost Model

After a company buys a long-term asset, it must choose how to measure it. Under the cost model, the asset sits at original cost less accumulated depreciation and accumulated impairment losses. Market value changes are ignored. This is the only model allowed for PP&E under US GAAP.

Under the IFRS revaluation model (IAS 16), the asset is carried at fair value at the revaluation date, less any later depreciation and impairment. Revaluation must be done often enough that carrying amount does not differ materially from fair value. If you revalue one asset, you must revalue its whole class (for example, all land or all buildings). You cannot cherry-pick.

The accounting depends on direction. A revaluation increase is recognised in other comprehensive income and accumulates in equity as revaluation surplus. The exception is when it reverses an earlier decrease on the same asset that went through profit or loss. Then the increase goes to profit or loss, up to the amount of that earlier loss. A revaluation decrease goes to profit or loss. The exception is when a surplus exists for that asset. Then the decrease first reduces the surplus through OCI.

After an upward revaluation, depreciation is based on the higher carrying amount over the remaining life. So later depreciation expense is higher and net income is lower than under the cost model. The surplus is never recycled to profit or loss. It may be transferred to retained earnings as the asset is used or when it is sold, and that transfer is within equity.

Investment property (IAS 40) is different. A company may use the cost model or the fair value model. Under the fair value model, the property is not depreciated, and fair value gains and losses go to profit or loss. Intangibles can be revalued under IAS 38 only if an active market exists, which is rare.

For analysis, an upward revaluation raises assets and equity at once, so debt-to-equity and debt-to-assets fall. It does not change cash flow or net income on the day. Later, higher depreciation lowers net income while the equity and asset bases are larger, so ROE and ROA typically fall. Asset turnover typically falls too because the asset base is bigger. Comparing a revaluing IFRS company with a cost-model company without adjusting for this is misleading.

Key formulas to remember

Carrying amount, cost model: Cost − accumulated depreciation − accumulated impairment losses; Fair value changes are ignored.
Carrying amount, revaluation model: Fair value at last revaluation − later accumulated depreciation − later impairment losses; Applied to the whole asset class, with revaluations regular enough to avoid material differences.
Revaluation gain or loss: Fair value − carrying amount before revaluation; Positive means increase. Negative means decrease.
Increase rule (IFRS): Increase → OCI (revaluation surplus), except up to any earlier loss on the same asset → profit or loss; Surplus is shown in equity.
Decrease rule (IFRS): Decrease → profit or loss, except up to any existing surplus on the same asset → OCI; Applied asset by asset.
Depreciation after revaluation: (Revalued carrying amount − residual value) ÷ remaining useful life; Straight-line case. Higher revalued amount means higher expense.
Investment property, fair value model: Gain or loss = change in fair value → profit or loss; no depreciation; IAS 40. Cost model alternative requires depreciation and fair value disclosure.

How to solve Revaluation Model and Cost Model questions

Use this order for any question on measurement after acquisition. It works for numerical items and for ratio-impact items.

1Identify the standard and asset: PP&E (IAS 16), investment property (IAS 40), intangible (IAS 38) or US GAAP. US GAAP PP&E uses the cost model only.
2Identify the model: cost, revaluation or fair value. Check whether the question says the company revalued.
3Compute the carrying amount just before revaluation: cost or last revalued amount less depreciation to that date.
4Find the revaluation difference: fair value minus that carrying amount. Note whether it is an increase or decrease.
5Check history for the same asset. Was there an earlier loss in profit or loss, or an existing surplus? Then split the amount between profit or loss and OCI.
6Recompute depreciation going forward using the new carrying amount and remaining life, then update net income.
7For ratio questions, work out the direction: assets and equity up, net income down later, so ROE and ROA typically fall and leverage ratios fall.
8Check that equity moved by the right amount: the surplus goes to OCI and equity, while profit or loss items go through retained earnings.

Quickest way: Direction and destination shortcut

When to use it: Use for conceptual or ratio items where you have about 90 seconds and must pick one of three options.

Ask: up or down? Up goes to OCI and surplus. Down goes to profit or loss.
Then check for a reversal of the earlier opposite item on the same asset. If so, that part goes the other way.
Investment property under fair value: everything goes to profit or loss, with no depreciation.
Ratio items: upward revaluation means higher equity and assets, so lower debt-to-equity and typically lower ROE, ROA and asset turnover. Eliminate options that say net income rises at revaluation.
For numbers, compute the depreciation on the revalued amount first. Most traps use the old depreciation.

Common mistakes in Revaluation Model and Cost Model

Putting an upward revaluation into profit or loss.
Students think a gain must hit net income, as with investment property.
Fix: For IAS 16 assets, an increase goes to OCI and revaluation surplus. It goes to profit or loss only to the extent it reverses a prior loss on the same asset.
Continuing old depreciation after a revaluation.
The asset's life seems unchanged, so the old expense is carried forward.
Fix: Depreciate the new carrying amount, less residual value, over the remaining life.
Depreciating investment property under the fair value model.
Students apply PP&E rules to all property.
Fix: Under the IAS 40 fair value model there is no depreciation. Fair value changes go to profit or loss.
Thinking revaluation raises ROE.
Bigger assets look like better performance.
Fix: Equity rises through the surplus, and later depreciation is higher, so ROE and ROA typically fall. Leverage ratios fall because equity and assets both rise while liabilities are unchanged.
Recycling the revaluation surplus to profit or loss on sale.
Confusion with other OCI items that are recycled.
Fix: The IAS 16 surplus is not recycled. It may be moved to retained earnings within equity.
Allowing upward revaluation of PP&E under US GAAP, or choosing which assets to revalue.
Students mix IFRS and US GAAP, or treat the model as an asset-by-asset choice.
Fix: US GAAP PP&E stays on the cost model. Under IFRS, revalue the entire class.

Worked examples

Example 1

A company buys a building for €1,000,000 with a 10-year life and no residual value. It uses straight-line depreciation and the IAS 16 revaluation model. At the end of Year 2 the building is revalued to a fair value of €960,000, and the remaining life stays at 8 years. What is Year 3 depreciation expense? (A) €100,000 (B) €120,000 (C) €160,000

Show the solution

Annual depreciation before revaluation = €1,000,000 ÷ 10 = €100,000.
Carrying amount at end of Year 2 = €1,000,000 − 2 × €100,000 = €800,000.
Revaluation increase = €960,000 − €800,000 = €160,000, recognised in OCI as revaluation surplus because there is no earlier loss.
Year 3 depreciation = €960,000 ÷ 8 remaining years = €120,000.
Option A is the old cost-model expense. Option C is the surplus, not an expense.

Answer: B. Year 3 depreciation is €120,000, which is €20,000 higher than under the cost model.

Example 2

A company revalued a machine downward by $30,000 two years ago, and the loss went to profit or loss. This year the machine is revalued upward by $50,000 under the IAS 16 revaluation model. Ignoring tax and depreciation effects, how much of this year's increase is recognised in OCI? (A) $20,000 (B) $30,000 (C) $50,000

Show the solution

The increase is $50,000.
Part of it reverses the earlier $30,000 loss on the same asset, so $30,000 is recognised in profit or loss.
The rest is $50,000 − $30,000 = $20,000, recognised in OCI as revaluation surplus.
Option C ignores the reversal rule. Option B is the profit or loss amount.

Answer: A. $20,000 goes to OCI and $30,000 goes to profit or loss.

Exam tips

Most items test destination: OCI versus profit or loss. Work out direction first, then check for a prior reversal on the same asset.
Expect ratio-impact items comparing a revaluing firm with a cost-model firm. Remember: equity and assets higher, ROE, ROA and asset turnover typically lower, leverage ratios lower, cash flow unchanged.
Watch for the words US GAAP. They signal that upward revaluation of PP&E is not allowed.
For investment property, check which model is used. Fair value means no depreciation and gains in profit or loss.
With numerical options listed smallest to largest, compute depreciation on the revalued amount. The cost-model figure is usually one of the wrong options.

Practice questions from Analysis of Long-Term Assets

Revaluation Model and Cost Model in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Revaluation Model and Cost Model: frequently asked questions

What is the difference between the revaluation model and the cost model?

The cost model carries an asset at cost less accumulated depreciation and impairment. The revaluation model carries it at fair value at the revaluation date, less later depreciation and impairment. IFRS allows both for PP&E, while US GAAP allows only the cost model.

Where does a revaluation surplus appear?

It is recognised in other comprehensive income and accumulated in equity under revaluation surplus. It does not pass through profit or loss when the revaluation happens. It is also not recycled to profit or loss later.

How does revaluation affect ROE and leverage ratios?

An upward revaluation raises equity and assets. Debt-to-equity and debt-to-assets fall. Later depreciation is higher, so net income is lower. With higher equity and lower income, ROE typically falls, and ROA typically falls as well.

How is investment property measured under IFRS?

IAS 40 lets a company choose the cost model or the fair value model. Under the fair value model, the property is not depreciated, and changes in fair value are recognised in profit or loss. Under the cost model, the property is depreciated and fair value is disclosed.