What is the Difference Between Cost Model and Revaluation Model?

The main difference between the cost model and the revaluation model lies in how the value of non-current assets, such as property, plant, and equipment, is determined and recorded in the financial statements. Here are the key differences between the two models:

1. Valuation: In the cost model, assets are valued at the cost incurred to acquire them, less accumulated depreciation and impairment losses. In the revaluation model, assets are shown at their fair value, which is an estimate of the market value.
2. Revaluation: The cost model does not require regular revaluations, while the revaluation model necessitates revaluations at regular intervals.
3. Class of Assets: Under the cost model, the classification of assets is not affected, while the entire class of assets must be revalued under the revaluation model.
4. Valuation Frequency: Valuation is carried out only once in the cost model, while valuations are conducted at regular intervals in the revaluation model.
5. Cost: The cost model is a less costly method compared to the revaluation model, which is a more expensive exercise due to the need for regular revaluations.

Companies can choose between the cost model and the revaluation model, but once they have chosen a model, they must consistently apply it to all of their non-current assets. The choice between the two models depends on factors such as the accuracy of asset valuation, the potential for management bias, and the cost of revaluation.

Comparative Table: Cost Model vs Revaluation Model

The main differences between the Cost Model and the Revaluation Model are related to the valuation basis, frequency of adjustments, volatility, and timeliness. Here is a table summarizing the key differences between the two models:

The Cost Model records assets at their original cost, less accumulated depreciation. This approach is less complicated and less costly compared to the Revaluation Model. However, it may not provide an accurate picture of the current market values of assets.

The Revaluation Model allows for upward or downward adjustments of assets' carrying amounts to reflect their current fair value. This model can provide a more accurate reflection of the current market values of assets but requires additional costs and resources to perform the revaluation. Management may also assign a higher revaluation than is reasonable for the market, introducing potential biases in valuation.

Both models are accepted under accounting standards, and companies must choose the method that best fits their unique needs and circumstances.