Fair Value Model vs. Revaluation Model

Attribute	Fair Value Model	Revaluation Model
Measurement Basis	Based on fair value	Based on revalued amount
Frequency of Measurement	Periodically	Periodically or when there is a significant change in fair value
Recognition of Changes in Value	Recognized in profit or loss	Recognized in other comprehensive income
Valuation Method	Market-based or income-based	Market-based or cost-based
Subsequent Measurement	Carried at fair value	Carried at revalued amount
Impairment Testing	Tested for impairment when indicators exist	Tested for impairment when indicators exist
Disclosure Requirements	Disclose fair value measurement techniques and inputs	Disclose revaluation method and significant assumptions

Introduction

When it comes to accounting for non-current assets, two commonly used models are the Fair Value Model and the Revaluation Model. These models provide different approaches to valuing assets and have their own unique attributes. In this article, we will explore and compare the attributes of both models, shedding light on their advantages and disadvantages.

Fair Value Model

The Fair Value Model is based on the principle that assets should be reported at their fair value, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Here are some key attributes of the Fair Value Model:

• Market-based valuation: The Fair Value Model relies on market prices or observable inputs to determine the fair value of an asset. This ensures that the reported value reflects the current market conditions.
• Volatility: Since fair values are subject to market fluctuations, the Fair Value Model can result in more volatile financial statements compared to other models. This is especially true for assets with highly volatile market prices.
• Relevance: The Fair Value Model provides users of financial statements with up-to-date information about the value of an entity's assets. This can be particularly useful for investors and creditors who want to assess the current financial position of the company.
• Complexity: Determining the fair value of an asset can be a complex process, especially when there are no active markets or observable inputs available. This complexity can lead to increased costs and subjectivity in the valuation process.
• Impairment recognition: Under the Fair Value Model, assets are tested for impairment regularly. If the fair value of an asset drops below its carrying amount, an impairment loss is recognized in the income statement.

Revaluation Model

The Revaluation Model, on the other hand, allows entities to report non-current assets at their revalued amounts, which are determined based on fair value at the date of revaluation. Let's explore the attributes of the Revaluation Model:

• Flexibility: The Revaluation Model provides entities with the flexibility to choose when to revalue their assets. This allows them to reflect changes in the fair value of assets over time, which can be particularly beneficial for assets that appreciate in value.
• Stability: Unlike the Fair Value Model, the Revaluation Model can result in more stable financial statements since revaluations are not affected by short-term market fluctuations. This can provide a more reliable picture of an entity's financial position.
• Cost savings: Revaluing assets less frequently can lead to cost savings for entities, as the valuation process can be time-consuming and expensive. This is especially true for assets that have a long useful life and do not experience significant changes in fair value.
• Conservatism: The Revaluation Model allows entities to recognize increases in the value of assets, but it does not permit recognition of decreases in value unless there is an impairment. This conservative approach can provide a more cautious representation of an entity's financial position.
• Comparability: Since entities have the discretion to choose when to revalue their assets, comparability between different entities may be compromised. This is because assets may be revalued at different points in time, leading to differences in reported values.

Comparison

Now that we have explored the attributes of both the Fair Value Model and the Revaluation Model, let's compare them to understand their differences and similarities:

• Valuation basis: The Fair Value Model relies on market-based valuations, while the Revaluation Model is based on revalued amounts determined by the entity.
• Volatility: The Fair Value Model can result in more volatile financial statements due to market fluctuations, while the Revaluation Model provides more stability as revaluations are not affected by short-term market changes.
• Complexity: Determining fair value can be complex under the Fair Value Model, especially when no active markets or observable inputs are available. The Revaluation Model, on the other hand, is relatively simpler as it involves revaluing assets based on the entity's own assessment.
• Impairment recognition: The Fair Value Model requires regular impairment testing, while the Revaluation Model recognizes impairment only when the carrying amount exceeds the revalued amount.
• Flexibility: The Revaluation Model provides entities with the flexibility to choose when to revalue their assets, while the Fair Value Model does not offer such flexibility.
• Cost savings: Revaluing assets less frequently can lead to cost savings for entities under the Revaluation Model, whereas the Fair Value Model may involve more frequent and costly valuations.
• Comparability: The Fair Value Model provides more comparability between entities as fair values are based on market prices, while the Revaluation Model may compromise comparability as assets can be revalued at different points in time.

Conclusion

Both the Fair Value Model and the Revaluation Model offer different approaches to valuing non-current assets. The Fair Value Model provides up-to-date information based on market prices, but it can be more volatile and complex. On the other hand, the Revaluation Model offers stability and flexibility, but it may compromise comparability between entities. Ultimately, the choice between the two models depends on the nature of the assets, the entity's objectives, and the needs of the users of financial statements.