03-19-2009, 12:31 AM
Lya,
There could be a number of reasons for choosing revaluation model instead of cost model or visa. Jurisdiction specific legal requirements associated with financing and loaning may also affect such decision.
However, there are two basic reasons which count while making such decision. The "historical cost convention" is being taken over by "fair value convention" with the passage of time. We see that all financial instruments (either liabilities or assets) are to be valued at fair value or at amortised cost that should also be fair value deriven amortised cost (IAS-39). All provisions have to be reviewed and updated as at balance sheet date as required by IAS 37 (i.e. that latest fair assessment). All defined benefit plan obligations have to be valued by actuaries based upon fair value based assumptions, deferred tax asset and deferred tax liability has to be assessed at each balance sheet date and impairment of every asset has to be assessed as at the reporting dates to reflect the prudent figures.
The fair valuation concept coupled with impairment assessment (prudence concept) has lead the world at large to think about presenting the accounts prudently on fair values. You will see that this concept will keep on capturing every component of financial reporting. However, it is sensibly different than the concept of stating the financial results and position on current values, a concept that was previously given by an IAS that has now been withdrawn.
So, the people who find it more appropriate to state the figures on prudent fair values, tend to use revaluation model.
Revaluation, which normally results in increased values, also strengthens the equity structure and improves the net worth of the entity without getting further contribution from equity owners. This gives an advantageous position while calculating DebtEquity ratio, which parameter, is used by financial institutions and banks at large, to decide about extending debt facilities. The improved equity means advantageous position in getting finance for long term and short term financing. In Pakistan, banks normally require debt equity ratio of 6040 for lending the debt (except for some specific industries where this ratio is relaxed). I don't know how banking system at Indonesia works.
People tend to opt cost model where they feel that changes to the values are not so material or where they feel the outcome may not be so beneficial when compared to the efforts or costs being incurred.
This is just a reason. However, IAS-16 provides liberty between the two options and an entity may use any one without giving any explanation for the causes and reasons.
To my knowledge there is no asset (in Property, plant and equipment category) that cannot be revalued. I understand revaluing mining resources and assets may be quite difficult but IAS-16 has not highlighted any exception.
Regards,
KAMRAN.
