A company can account for changes in the market value of its various fixed assets by conducting a revaluation of the fixed assets. Revaluation of a fixed asset is the accounting process of increasing or decreasing the carrying value of a company’s fixed asset or group of fixed assets to account for any major changes in the fair market value of the fixed asset or group of fixed assets.
Initially, a fixed asset or group of fixed assets is recorded on a company’s balance sheet at the cost paid for the asset. Afterward, there are two methods used to account for changes in the fixed asset or assets.
The most straightforward accounting approach is the cost model. With the cost model, a company’s fixed assets are carried at their historical cost minus the accumulated depreciation and accumulated impairment losses associated with those assets. The cost model does not allow for upward adjustments in the value of an asset based on the fair market value.
The second accounting approach is the revaluation model. With the revaluation model, a fixed asset is originally recorded at cost, but the carrying value of the fixed asset can then be increased or decreased depending on the fair market value of the fixed asset, normally once a year. If an asset reduces in value, it is said to be written down. Under International Financial Reporting Standards (IFRS), assets that are written down to their fair market value can be reversed, while under generally accepted accounting principles (GAAP), assets that are written down remain impaired and cannot be reversed.