This was an interesting query which I am sure has caused problems over the years.

The Facts
Company A has decided it wants to revalue a class of assets.  Previously this class of assets were measured at cost (per FRS 15 ‘Tangible Fixed Assets’).

Company A adopted the revaluation model for a couple of years but then decided it then wanted to revert back to the cost model.

The question here was, is this permitted?

Steve’s Opinion
FRS 15 allows two options of measuring fixed assets: the cost model or the revaluation model (its international counterpart IAS 16 allows the same).

Clearly an entity can switch from the cost model to the revaluation model, but can it be reversed?

I think the answer is no it cannot.

The reason I think it is not possible is because of the provisions in FRS 18 ‘Accounting Policies’.

A change from the cost model to the revaluation model is a change in accounting policy.  A change in accounting policy is made because under the provisions of FRS 18, this information will result in the financial statements giving a true and fair view.  The Directors of an entity are required to assess their accounting policies under FRS 18 to see if they remain appropriate in their particular circumstances.  If they do not remain appropriate, they must change them.  Clearly at some point in time, Company A established the cost model was no longer an appropriate basis for measuring the applicable class of fixed asset and the revaluation model was.

I am of the opinion that market value (fair value) would always achieve truth and fairness (only in terms of fixed (non-current) asset revaluation rather than full fair value accounting) as opposed to the asset(s) original cost and if an entity has chosen the revaluation model subsequent to adopting the cost model, then clearly they did this to accord to the truth and fairness principles.  For example, in many cases it is only land and buildings that are subject to revaluations and in today’s climate, fair vales of such achieve much more credibility (enhancing truth and fairness) than depreciated historic cost would and the same would apply to any revalued fixed asset.