Revaluation of Property, Plant and Equipment (PPE) is one of those accounting topics that sounds straightforward, but very quickly becomes misunderstood – even by experienced professionals.
One of the most common questions we hear is:
“Is revaluation of assets actually allowed, especially under IFRS for SMEs?”
The short answer is yes – but the longer answer is where the real value (and risk) lies.
This article unpacks:
- whether revaluation is permitted under IFRS and IFRS for SMEs,
- how revaluation is accounted for,
- the tax and deferred tax consequences, and
- why revaluation is far more than a balance-sheet exercise.
What Is Revaluation – and Why Does It Matter?
Property, Plant and Equipment are typically long-term assets: land, buildings, machinery, vehicles. Over time, their economic value can change, particularly for land and buildings.
Revaluation allows an entity to adjust the carrying amount of these assets to reflect fair value, rather than historical cost.
Done correctly, revaluation can:
- improve the relevance of financial statements,
- better reflect an entity’s financial position, and
- align asset values with economic reality.
Done poorly, it can:
- inflate equity artificially,
- introduce volatility,
- trigger deferred tax liabilities that erode apparent gains.
Cost Model vs Revaluation Model
Under both IFRS and IFRS for SMEs, PPE is initially recognised at cost. After that, entities may choose between:
- the cost model (cost less depreciation and impairment), or
- the revaluation model (fair value less subsequent depreciation and impairment).
The key point – and the source of much confusion – is this:
Both IFRS and IFRS for SMEs allow the revaluation model for PPE.
The difference is not permission. The difference is complexity and disclosure.
Under the revaluation model:
If fair value exceeds the carrying amount, the increase is recognised as a revaluation surplus.
This surplus is recorded in Other Comprehensive Income (OCI) and accumulated in equity.
It does not go through profit or loss.
This treatment applies under:
- IAS 16 (full IFRS), and
- Section 17 (IFRS for SMEs).
What About Tax?
Revaluation is where accounting and tax diverge.
- Revaluation gains are not taxed immediately
- Tax is typically triggered only on disposal
However, accounting standards still require recognition of deferred tax.
When an asset is revalued upward:
- The accounting carrying amount increases
- The tax base usually does not
- A taxable temporary difference arises
This results in a deferred tax liability, recognised:
- in OCI, alongside the revaluation surplus
The effect is important:
A R2 million revaluation does not mean R2 million of usable equity.
Deferred tax can materially reduce the net impact.
Depreciation: The Quiet Consequence
After revaluation, depreciation is recalculated based on the revalued amount.
For buildings, this often means:
- higher annual depreciation,
- lower future profits,
- ongoing differences between accounting and tax depreciation.
This is one of the most overlooked consequences of revaluation.
Disclosure: Where IFRS and IFRS for SMEs Really Differ
While both frameworks allow revaluation, disclosure requirements differ significantly.
Under full IFRS, entities must disclose:
- valuation techniques and assumptions,
- involvement of independent valuers,
- movements in revaluation surplus,
- carrying amounts under the cost model,
- restrictions on distribution of reserves.
IFRS for SMEs requires fewer disclosures, but still enough to ensure users understand:
- that revaluation has been applied,
- when it occurred,
- and how it affected the financial statements.
Final Thoughts
Revaluation is not a cosmetic exercise. It affects:
- equity,
- profit trends,
- deferred tax,
- stakeholder perceptions.
Both IFRS and IFRS for SMEs permit revaluation – but whether it is appropriate depends on strategy, transparency, and long-term impact, not just headline numbers.
While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither the writer nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes.
