Key Takeaways
- The cost model requires no remeasurement; the revaluation model demands periodic fair value updates.
- Either election applies to an entire class of PP&E, not to individual assets within that class.
- Entities revaluing land and buildings typically engage an external valuer every three to five years.
- Choose the cost model when reliable fair values are unavailable or valuation costs exceed the reporting benefit.
Side-by-side comparison
| Dimension | Cost model (IAS 16.30 / IAS 38.74) | Revaluation model (IAS 16.31 / IAS 38.75) |
|---|---|---|
| Measurement after recognition | Historical cost less accumulated depreciation less impairment | Fair value at revaluation date less subsequent depreciation and impairment |
| Upward movement in value | Ignored entirely; no recognition until disposal | Recognised in OCI and accumulated in revaluation surplus within equity (IAS 16.39) |
| Downward movement in value | Impairment loss in profit or loss when indicators exist | Charged against existing surplus first; excess goes to profit or loss (IAS 16.40) |
| External valuation requirement | None | Required in practice for most asset classes, particularly land and buildings |
| Availability for intangibles | Always available (IAS 38.74) | Permitted only where an active market exists for the intangible (IAS 38.75) |
| Audit effort | Focuses on cost records, useful life, residual value, and impairment indicators | Adds valuer competence, independence, methodology testing, and class-wide application checks |
Decision rule: Use the cost model when the asset class has no liquid market or when the cost of regular valuation outweighs the reporting benefit. Use the revaluation model when management wants the balance sheet to reflect current market values and reliable fair values are obtainable at reasonable cost.
When the distinction matters on an engagement
The election changes what the auditor tests. Under the cost model, the engagement team focuses on the completeness of cost records, the appropriateness of useful life and residual value estimates, and whether impairment indicators exist at the reporting date. Under the revaluation model, the team must also evaluate the external valuer's competence, objectivity, and methodology under ISA 500.8, test whether the revaluation covered every asset in the elected class (IAS 16.36), and verify that the deferred tax on any surplus was recognised in OCI rather than profit or loss (IAS 12.61A).
Problems arise when an entity switches models mid-stream. IAS 8.14 treats a voluntary change from cost to revaluation as permissible only if it produces more relevant information. The auditor tests whether the entity applied the change to the entire class and whether first-time revaluation was performed by a suitably qualified valuer. An incomplete switch (three buildings revalued, two left at cost within the same class) violates IAS 16.36 and creates a qualification risk under ISA 705.
Worked example: Bergström Skog AB
Client: Swedish forestry and paper company, FY2025, revenue €75M, IFRS reporter. Bergström holds two classes of PP&E relevant to this comparison: forest land and paper mill machinery.
Applying the cost model to machinery
Step 1 — Determine carrying amount: Bergström's paper mill line was acquired in 2020 for €18M. Accumulated straight-line depreciation over five years at a useful life of fifteen years (residual value €1.2M) totals €5.6M. Carrying amount at 31 December 2025 is €12.4M.
Documentation note: record the cost build-up from acquisition invoices, confirm the depreciation method (straight-line per IAS 16.62), useful life of fifteen years, and residual value of €1.2M per IAS 16.73(b)–(d). Reconcile to the fixed asset register.
Step 2 — Assess impairment indicators: Order volumes dropped 12% in H2 2025. This is an internal indicator per IAS 36.12(f). The team tests recoverable amount and determines value in use of €13.1M, which exceeds carrying amount. No impairment is required.
Documentation note: record the indicator identified, the value-in-use calculation (discount rate, projected cash flows, terminal value), and the conclusion that recoverable amount exceeds carrying amount.
Applying the revaluation model to forest land
Step 3 — Obtain valuation: An independent valuer estimates the fair value of Bergström's 4,200 hectares of forest land at €22.5M as at 31 December 2025, using a market approach based on recent sales of comparable forest parcels in central Sweden. The previous carrying amount (cost model basis before election) was €16.8M.
Documentation note: file the valuer's report. Record the valuer's qualifications, independence, and the key inputs (price per hectare, comparable transactions, timber price assumptions). Document that the revaluation model is elected for the entire forest land class per IAS 16.29.
Step 4 — Recognise the revaluation surplus and deferred tax: The increase of €5.7M goes to OCI and accumulates in the revaluation surplus (IAS 16.39). At Sweden's corporate tax rate of 20.6%, the deferred tax liability is €1,174,200, debited against the surplus in OCI (IAS 12.61A). Net surplus in equity is €4,525,800.
Documentation note: record the journal entries for the surplus (debit PP&E €5.7M, credit revaluation surplus OCI €5.7M) and deferred tax (debit revaluation surplus OCI €1,174,200, credit deferred tax liability €1,174,200). Cross-reference to the tax computation working paper.
Conclusion: the same entity applies both models to different asset classes on the same engagement, which is permitted because each class is treated independently. If the engagement team had accepted a revaluation on the machinery class without confirming that a class-wide election existed, it would have violated IAS 16.36 and accepted a measurement basis without proper policy support.
What reviewers and practitioners get wrong
- Teams accept a partial revaluation within a single asset class. IAS 16.36 requires that when the revaluation model is elected, all assets in the class are revalued. Revaluing one flagship property while leaving others at cost within the same class creates a non-compliance that inspectors flag as a failure to apply the accounting policy consistently.
- The deferred tax consequence of a revaluation surplus is frequently either omitted or posted to profit or loss. IAS 12.61A directs the entity to recognise the deferred tax in the same component of equity (OCI) where the surplus itself sits. ISA 540.13(b) requires the auditor to evaluate whether the data and assumptions underlying the deferred tax calculation match the method the entity used for the surplus.
Related terms
Frequently asked questions
Can an entity use the cost model for one class and the revaluation model for another?
Yes. IAS 16.29 defines the election at the class level. An entity can apply the cost model to its machinery class and the revaluation model to its land and buildings class. The restriction is that every asset within a given class must follow the same model. ISA 540.13(a) requires the auditor to confirm the policy is applied consistently within each class.
Is the revaluation model available for all intangible assets?
No. IAS 38.75 permits the revaluation model for intangible assets only when an active market exists. Active markets exist for very few intangible categories (certain broadcasting licences, taxi permits, fishing quotas). For software, customer relationships, and patents, the cost model is the only available measurement basis in practice.
What happens when an entity switches from the cost model to the revaluation model?
IAS 8.14 permits the change only if it results in more relevant and reliable information. The entity applies the revaluation to the entire class at the date of the policy change. The resulting increase above the previous carrying amount goes to OCI as a revaluation surplus (IAS 16.39). ISA 540.13(a) requires the auditor to evaluate whether the new method is appropriate and whether the entity has a reliable source of fair values for the complete class.