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CFA Level I · CFA Level I Exam · Analysis of Long-Term Assets

Compared with the cost model, an entity that applies the revaluation model to its depreciable property after an upward revaluation will most likely report in later periods:

The entity will most likely report higher depreciation expense and a lower return on assets. The upward revaluation raises the carrying amount and depreciable base, which lowers profit while increasing total assets and equity compared with the cost model.

  1. Alower depreciation expense and a lower asset base
  2. Bthe same depreciation expense but a higher equity balance
  3. Chigher depreciation expense and a lower return on assetsCorrect

Explanation

After an upward revaluation the carrying amount rises, so depreciation over the remaining life is higher, reducing profit. Total assets are higher too, so return on assets and asset turnover are lower than under the cost model. The same-depreciation option ignores the higher depreciable base.

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