The unpopularity of revaluation

Humbly, I would suggest that anyone who has chosen either of those is wrong. The least useful part of the standards is, in fact, one of the most frequently taught areas, and one that all readers will be familiar with.

Over the past 20 or so years of teaching financial reporting, I have seen a number of changes to IFRS Accounting Standards to eliminate possible alternative treatments. These changes have included:

• the removal of proportional consolidation for jointly controlled entities, meaning that only the equity method (itself not immune from criticism – see my column ‘The murky world of JV accounting’) can be used
• the removal of the optional corridor method in IAS 19, Employee Benefits, meaning that the remeasurement component on defined benefit pension schemes is recorded in other comprehensive income annually
• the removal of the choice of whether or not to capitalise borrowing costs in accordance with IAS 23, Borrowing Costs
• the removal of judgment as to whether a lease is a finance or operating lease for lessees following the issue of IFRS 16, Leases

Most of these changes have been positive, particularly the removal of the corridor method, which is something I used to introduce my students to by saying: ‘We’re about to talk about something weird, but we have to know it.’

Flawed model

All of that brings me to the least useful part of all IFRS Accounting Standards, and it relates to choice. It is the revaluation model in IAS 16, Property, Plant and Equipment, and IAS 38, Intangible Assets.

The model usage under IAS 38 is more obviously problematic, as even the standard itself states it should be incredibly rare as an active market is needed. As a reminder, an active market is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

The revaluation model under IAS 16 is something that accounting students are taught incredibly early on, as a core part of the lectures on non-current assets. To become a professional accountant, you would expect it to be in at least one of the exams. Students learn the process, they are told the impact of the revaluation model on key ratios, and they go through the potential for reserves transfer in the statement of changes in equity.

None of this is too technical, and students are happy to go through the process and can generally produce reasonable answers on it. It is a core area on most accounting syllabuses that cover IFRS Accounting Standards. So what’s the problem?

No company uses it. Not one. It is the choice that no one makes. It is the cheeseboard on the dessert menu. It is the filet-o-fish of accounting standards.

For full disclosure, I am aware that there will be people willing to comment on certain companies that actually use it but it is incredibly rare. When trying to produce examples of companies that do it, I searched and searched and could only come up with examples that no student would have heard of.

Little incentive

So why does no company use it? It could be suggested that many companies with significant property assets lease them, meaning assets are recorded under IFRS 16 rather than IAS 16. However, major supermarkets Tesco and Carrefour, two of the top property owners in Europe, have almost three times as much owned property as leased property, so this cannot be the reason.

Part of the reason may also be that revaluation of property, plant and equipment is prohibited under US GAAP, but much more important is that there is very little incentive for companies to use it.

To apply the revaluation model, entities must keep revaluing with sufficient regularity to ensure the asset carrying amounts are not materially different from market value. This can make it a time-consuming and costly exercise with very little benefit. What’s more, revaluing the assets will lead to higher depreciation and therefore negatively affect profit margins.

So there we have it. Even though the International Accounting Standards Board has reduced most of the choice in IFRS Accounting Standards, there is one large anomaly and it is the one that no one uses. While there are many other issues to resolve within financial reporting, is it time to remove this unnecessary choice? I am pretty confident that only accounting students would notice.