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Corporate Financial Reporting · Property, Plant and Equipment (Ind AS 16)

Cost Model and Revaluation Model under Ind AS 16

Updated 11 October 2026 · Fact-checked

Ind AS 16 lets you carry each class of PPE at cost less depreciation and impairment (cost model) or at revalued amount (revaluation model). A revaluation increase goes to OCI as revaluation surplus, unless it reverses an earlier loss in profit or loss. A decrease hits profit or loss, except to the extent of the surplus balance for that asset.

Understand Cost Model and Revaluation Model

Ind AS 16 gives you a policy choice for subsequent measurement. Under the cost model, an asset is carried at cost less accumulated depreciation and accumulated impairment losses. Market value changes are ignored. Under the revaluation model, an asset whose fair value can be measured reliably is carried at its fair value at the revaluation date, less later depreciation and impairment. The choice applies to a whole class of assets, not to single items. This is the standard rule, though the text supplied here covers only the accounting for revaluations and not the class rule.

When you revalue, the carrying amount is adjusted to the revalued amount (para 35). You can either restate the gross carrying amount and accumulated depreciation proportionately or by market data, or eliminate accumulated depreciation against the gross carrying amount. Either way, the change in carrying amount is one number, and it is accounted for under paras 39 and 40.

The core rule is a mirror image. An increase goes to OCI and builds up revaluation surplus in equity. It goes to profit or loss only to the extent it reverses a revaluation decrease of the same asset earlier recognised in profit or loss (para 39). A decrease goes to profit or loss. It goes to OCI only to the extent of any credit balance in the revaluation surplus for that asset, reducing that surplus (para 40). Always work asset by asset, not in total.

Frequency depends on how fast fair value moves (para 34). If fair value differs materially from carrying amount, you must revalue again. Volatile assets may need annual revaluation. Assets with insignificant movements may need it only every three or five years.

The surplus can move to retained earnings when the asset is derecognised, or gradually as the asset is used. The gradual transfer equals depreciation on the revalued amount minus depreciation on original cost. This transfer is not made through profit or loss (para 41). Tax effects follow Ind AS 12 (para 42).

Key rules to remember

Revaluation increase
Increase = Fair value − Carrying amount. Credit OCI (revaluation surplus), except up to the earlier loss of the same asset charged to profit or loss, which is credited to profit or loss
Para 39. Apply asset by asset.
Revaluation decrease
Decrease = Carrying amount − Fair value. Debit revaluation surplus up to its credit balance for that asset; excess to profit or loss
Para 40. The OCI part reduces the surplus in equity.
Annual transfer of surplus (if the entity chooses)
Transfer = Depreciation on revalued carrying amount − Depreciation on original cost
Para 41. From revaluation surplus to retained earnings, not through profit or loss.
Depreciation after revaluation
Depreciation = Revalued carrying amount ÷ Remaining useful life (straight line, no residual value)
Revalued amount is the new depreciable base.
Frequency
Revalue again when fair value differs materially from carrying amount
Para 34. Volatile assets: often annually. Stable assets: every three or five years.

How to solve Cost Model and Revaluation Model questions

Use this sequence for any revaluation numerical. It keeps the OCI and profit or loss split correct.

  1. 1Find the carrying amount just before revaluation: cost less accumulated depreciation (and impairment) up to the revaluation date.
  2. 2Compute the difference between fair value and carrying amount. Note whether it is an increase or a decrease.
  3. 3Check the history of that same asset: any earlier revaluation loss charged to profit or loss, or any surplus balance still in equity.
  4. 4For an increase: credit profit or loss up to the earlier loss reversed, credit OCI (revaluation surplus) for the balance. For a decrease: debit revaluation surplus up to its balance, debit profit or loss for the rest.
  5. 5Write the journal entry. Show the adjustment of the gross amount and accumulated depreciation if asked.
  6. 6Recompute depreciation on the revalued amount over the remaining useful life for the following years.
  7. 7If asked, compute the surplus transfer to retained earnings and note that it bypasses profit or loss. Mention deferred tax under Ind AS 12 if tax is given.

Quickest way: Three-line surplus tracker

When to use it: Use it in multi-year questions with several revaluations of one asset.

  1. Draw a small table with columns: Year, Carrying amount, Fair value, Gain or (loss).
  2. Track two running balances: revaluation surplus (OCI) and cumulative loss charged to profit or loss.
  3. For each gain, first clear the profit or loss loss balance, then add the rest to surplus. For each loss, first use up surplus, then charge profit or loss.
  4. Compute next year's depreciation from the new carrying amount and remaining life, then repeat.

Common mistakes in Cost Model and Revaluation Model

  • Crediting every revaluation gain to profit or loss

    Students link gains with income, as in the old habit of treating gains as profit.

    Fix: Credit OCI and revaluation surplus, unless the gain reverses an earlier loss of the same asset charged to profit or loss.

  • Netting gains and losses across different assets

    Students compute the class total difference.

    Fix: Apply paras 39 and 40 asset by asset. The surplus of one asset cannot absorb the loss of another.

  • Charging a decrease fully to profit or loss when surplus exists

    Students forget the earlier surplus balance.

    Fix: Debit the revaluation surplus up to its credit balance for that asset first, then profit or loss.

  • Routing the annual surplus transfer through profit or loss

    It looks like depreciation.

    Fix: Transfer directly from revaluation surplus to retained earnings. Para 41 says it is not made through profit or loss.

  • Depreciating on original cost after revaluation

    Students keep the old schedule.

    Fix: Use the revalued carrying amount over the remaining useful life.

  • Revaluing a single asset only to suit results

    Students treat the model as an item-by-item choice.

    Fix: The policy applies to a class of assets. When revaluing, revalue the whole class, as the standard requires.

Worked examples

Example 1

Entity A bought a machine on 1 April 2024 for ₹10,00,000, useful life 10 years, straight line, nil residual value. On 31 March 2026 its fair value is ₹9,60,000 and the entity uses the revaluation model. On 31 March 2027 fair value is ₹7,00,000. Show the accounting on both dates.

Show the solution
  1. Annual depreciation = ₹10,00,000 ÷ 10 = ₹1,00,000.
  2. Carrying amount on 31 March 2026 = ₹10,00,000 − 2 × ₹1,00,000 = ₹8,00,000.
  3. Increase = ₹9,60,000 − ₹8,00,000 = ₹1,60,000. No earlier loss, so credit OCI.
  4. Entry: Dr Machine (gross/accumulated depreciation adjusted) ₹1,60,000; Cr Other comprehensive income (revaluation surplus) ₹1,60,000.
  5. Remaining life = 8 years. Depreciation for 2026-27 = ₹9,60,000 ÷ 8 = ₹1,20,000.
  6. Carrying amount on 31 March 2027 = ₹9,60,000 − ₹1,20,000 = ₹8,40,000.
  7. Decrease = ₹8,40,000 − ₹7,00,000 = ₹1,40,000.
  8. Surplus balance is ₹1,60,000, so the whole decrease goes to OCI: Dr Revaluation surplus ₹1,40,000; Cr Machine ₹1,40,000. Surplus left = ₹20,000. Profit or loss is not charged.

Answer: On 31 March 2026, ₹1,60,000 is credited to revaluation surplus through OCI. On 31 March 2027, the ₹1,40,000 decrease is debited entirely to the surplus, leaving ₹20,000, with nothing in profit or loss.

Example 2

Entity B revalued a plant on 31 March 2025. Carrying amount was ₹5,00,000 and fair value ₹4,20,000. On 31 March 2026 the carrying amount after depreciation was ₹3,60,000 and fair value ₹4,10,000. The plant has a remaining life of 6 years at 31 March 2026. Show the accounting for both years and the 2026-27 depreciation.

Show the solution
  1. 31 March 2025: decrease = ₹5,00,000 − ₹4,20,000 = ₹80,000. No surplus exists, so debit profit or loss ₹80,000 and credit Plant ₹80,000.
  2. 31 March 2026: increase = ₹4,10,000 − ₹3,60,000 = ₹50,000.
  3. The increase reverses the earlier loss of ₹80,000 on the same asset, and ₹50,000 is less than ₹80,000.
  4. So the whole ₹50,000 is credited to profit or loss: Dr Plant ₹50,000; Cr Profit or loss (revaluation gain) ₹50,000.
  5. Nothing goes to OCI because the earlier loss (₹80,000) is not yet fully reversed.
  6. Depreciation for 2026-27 = ₹4,10,000 ÷ 6 = ₹68,333 (rounded).

Answer: The 2025 loss of ₹80,000 is charged to profit or loss. The 2026 gain of ₹50,000 is credited fully to profit or loss, with no OCI. Depreciation for 2026-27 is about ₹68,333.

Exam tips

  • In case-based MCQs, check first whether the asset has an earlier loss or surplus. The answer usually depends on that history.
  • Always label the credit as OCI (revaluation surplus) or profit or loss. Marks are given for the correct head, not only the amount.
  • In multi-year numericals, show the carrying amount before each revaluation and the new depreciation base separately.
  • Write one line on para 41 whenever the question mentions retained earnings: the transfer does not go through profit or loss.
  • If tax rates are given, add the deferred tax on the surplus as per Ind AS 12.

Practice questions from Property, Plant and Equipment (Ind AS 16)

Cost Model and Revaluation Model in other exams

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

Cost Model and Revaluation Model: frequently asked questions

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

The cost model carries PPE at cost less accumulated depreciation and impairment. The revaluation model carries it at fair value at the revaluation date less later depreciation and impairment. Revaluation gains and losses arise only under the revaluation model.

Where is a revaluation surplus shown?

A revaluation increase is recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus. It is not part of profit for the year, unless it reverses an earlier loss of the same asset charged to profit or loss.

How often must PPE be revalued?

It depends on changes in fair value. When fair value differs materially from carrying amount, a further revaluation is needed. Volatile assets may need annual revaluation, while stable assets may need it only every three or five years.

Can the revaluation surplus be transferred to retained earnings?

Yes. It may be transferred when the asset is derecognised, or gradually as the asset is used. The gradual amount is depreciation on the revalued amount minus depreciation on original cost. The transfer does not go through profit or loss.