- 4 Marks
Question
Once an entity has recognized an item of Property, Plant, and Equipment as an asset in its books, the entity can choose between two models (or methods) to account for the asset in subsequent measurement periods, that is, the period(s) after the asset has been acquired and before its disposition. The two models are the cost model and the revaluation model. The entity shall apply the same model to the entire class of property, plant, and equipment to which that asset is of similar nature and use in the entity’s operations.
Required:
Identify TWO differences between the cost and revaluation model for the measurement of Property, Plant, and Equipment. (4 marks)
Answer
Answer:
- Cost Model:
Under the cost model, Property, Plant, and Equipment (PPE) are carried at cost less accumulated depreciation and impairment losses. This model is more objective because it uses historical cost, which is definite and unchanging, but it provides less relevant, up-to-date information. - Revaluation Model:
Under the revaluation model, PPE are carried at their fair value, which is the revalued amount less any subsequent accumulated depreciation and impairment losses. This model provides more relevant and current information about the asset’s value, but it is subjective as it relies on expert valuation, which can fluctuate based on market conditions. Revaluations must be done regularly when fair values can change significantly.
Other Differences:
- Impact on Depreciation:
The cost model provides lower depreciation as it is based on the original cost, while the revaluation model may increase depreciation because it is based on the revalued amount. - Complexity and Cost:
The revaluation model requires expert valuations, making it more expensive and complex to apply compared to the cost model, which is simpler and cheaper.
(Any two points for 4 marks)
- Tags: and Equipment, Cost Model, IAS 16, Plant, Property, Revaluation Model
- Level: Level 2
- Topic: Financial Reporting Standards and Their Applications
- Series: MAY 2018
- Uploader: Dotse