Revaluation vs. Impairment — What's the Difference?
By Maham Liaqat & Urooj Arif — Updated on May 7, 2024
Revaluation is the process of adjusting the book value of an asset to its current market value, whereas impairment involves reducing the book value of an asset when its recoverable amount falls below its carrying amount.
Difference Between Revaluation and Impairment
Table of Contents
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Key Differences
Revaluation typically occurs in a context where assets such as property, plant, and equipment are adjusted upwards or downwards to reflect fair market values. On the other hand, impairment specifically refers to a decrease in the recoverable value of an asset, leading to a write-down in its book value.
While revaluation can result in an increase or decrease in the value of an asset, impairment exclusively results in a reduction, reflecting a permanent loss in the value of the asset. Revaluation adjustments can be reversed if the market value of the asset increases, whereas impairments are generally not reversible under most accounting standards.
Revaluation is often used in international accounting and in sectors where fixed assets experience significant fluctuations in value, such as real estate. Impairment, however, is a concept used across all sectors to ensure that the asset values on the balance sheet are not overstated.
The process of revaluation may lead to increases in the asset values on the balance sheet, potentially boosting an entity’s net worth. In contrast, impairment charges can have a significant negative impact on both the balance sheet and the income statement, reducing earnings.
Revaluation is a proactive measure that can be undertaken periodically as per the policy of the entity or when market conditions indicate a significant change in asset values. Impairment testing, however, is required by accounting standards when there is an indication that an asset might be impaired, such as changes in market conditions or poorer than expected asset performance.
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Comparison Chart
Direction of Adjustment
Can increase or decrease
Only decreases
Reversibility
Can be reversed if value increases
Generally irreversible
Purpose
Reflects current market value
Ensures asset is not overstated
Impact on Financials
Can increase or decrease equity
Reduces net income and asset value
Common Contexts
Real estate, international accounting
All sectors, regular assessments
Compare with Definitions
Revaluation
Adjusting the book value of an asset to reflect its current market value.
The company revalued its land holdings due to a surge in real estate prices.
Impairment
Directly impacts profit and loss.
The impairment charge led to a significant reduction in this year's profit.
Revaluation
Often performed on tangible fixed assets.
Our factory equipment was revalued downwards following new market developments.
Impairment
Must be tested for annually or when there's an indication of loss in value.
The annual impairment test resulted in a write-down of assets.
Revaluation
Affects balance sheet items but may not immediately impact net income.
The revaluation resulted in a higher total assets figure on the balance sheet.
Impairment
A reduction in the recoverable amount of an asset below its book value.
The company recognized an impairment loss on its outdated machinery.
Revaluation
Requires revaluation reserves in equity for increases.
The increase in property value was transferred to a revaluation reserve.
Impairment
Indicates a permanent reduction in the value of an asset.
Impairment of the goodwill was due to declining market conditions.
Revaluation
Can lead to an increase or decrease in asset value.
Following the revaluation, the value of the building increased by 15%.
Impairment
Applied to both tangible and intangible assets.
There was an impairment of intellectual property rights due to technological obsolescence.
Revaluation
Revaluation is a change in a price of a good or product, or especially of a currency, in which case it is specifically an official rise of the value of the currency in relation to a foreign currency in a fixed exchange rate system. In contrast, a devaluation is an official reduction in the value of the currency.
Impairment
To cause to weaken, be damaged, or diminish, as in quality
An injury that impaired my hearing.
A severe storm impairing communications.
Revaluation
To make a new valuation of.
Impairment
The result of being impaired
Revaluation
To increase the exchange value of (a nation's currency).
Impairment
A deterioration or weakening
Revaluation
The process of altering the relative value of a currency or other standard of exchange.
After the new party took power, the government declared a revaluation of the currency in an attempt to limit runaway inflation.
Impairment
A disability or handicap
Visual impairment
Revaluation
A reassessment of the value or worth of something; a reappraisal or reevaluation.
After the soldiers raided her farm for supplies, she was forced to a revaluation of their benefit as protectors.
Impairment
An inefficient part or factor.
Revaluation
The application of compound growth to the value of a pension benefit, specifically from the date of the member leaving the scheme (for example, moving to a different employer) to the date that the member starts receiving the benefit (typically retirement).
Impairment
(accounting) A downward revaluation, a write-down.
Revaluation
A second or new valuation.
Impairment
The state, act, or process of being impaired; injury.
Revaluation
A new appraisal or evaluation
Impairment
The occurrence of a change for the worse
Impairment
A symptom of reduced quality or strength
Impairment
The condition of being unable to perform as a consequence of physical or mental unfitness;
Reading disability
Hearing impairment
Impairment
Damage that results in a reduction of strength or quality
Impairment
The act of making something futile and useless (as by routine)
Common Curiosities
Can any asset be revalued?
Not all assets are eligible for revaluation; typically, it is applicable to tangible fixed assets like land and buildings. Intangible assets and those that do not have a market value are generally excluded.
What is a recoverable amount in the context of impairment?
The recoverable amount is the higher of an asset's fair value less costs to sell and its value in use, which is the present value of the future cash flows expected to be derived from an asset.
What is the impact of impairment on shareholder equity?
Impairment losses reduce the carrying amount of assets on the balance sheet, thereby reducing total shareholders’ equity.
Are revaluation gains taxable?
The tax implications of revaluation gains can vary by jurisdiction. In some cases, revaluation gains are not taxable unless the asset is sold and the gain is realized.
Is there a limit to how many times an asset can be revalued?
There is no specific limit on the number of times an asset can be revalued, as long as revaluations are carried out in accordance with applicable accounting standards and reflect true changes in the asset’s market value.
How often should an asset be revalued?
The frequency of revaluation depends on the volatility of the asset’s market value. Some assets may be revalued annually, while others might be less frequently revalued depending on company policy and regulatory requirements.
What are the signs that an asset might be impaired?
Signs include significant declines in market value, adverse changes in technology or markets, increases in market interest rates, or poor economic performance of the asset.
What happens if an impairment loss is later reversed?
Under most accounting standards like IFRS, impairment losses on assets like property, plant, and equipment cannot be reversed if the reasons for the impairment no longer exist; however, reversals are allowed for goodwill under certain circumstances.
How do revaluation and impairment affect financial ratios?
Revaluation can affect ratios such as asset turnover and return on assets by changing the asset base. Impairment generally lowers profitability ratios like return on assets and can impact debt ratios.
Can impairment affect a company’s borrowing capacity?
Yes, since impairment reduces the value of a company's assets, it may negatively impact the company's borrowing capacity by altering debt-to-equity and asset-to-liability ratios.
Does revaluation impact depreciation calculations?
Yes, if an asset's value is increased through revaluation, the new, higher value is used to calculate depreciation, resulting in higher depreciation expense in future periods.
Who decides when to revalue an asset?
The decision to revalue an asset is typically made by management, often based on recommendations from financial analysts or in accordance with external appraisal.
What are the accounting standards governing revaluation and impairment?
Revaluation and impairment are governed by international accounting standards such as IFRS (International Financial Reporting Standards) and, in the United States, by GAAP (Generally Accepted Accounting Principles).
How is revaluation surplus treated in financial statements?
A revaluation surplus is recognized in equity under a revaluation reserve and is shown in the other comprehensive income section of the shareholders' equity until the asset is sold or retired.
What documentation is required for revaluation and impairment?
Documentation typically includes external valuations, assessments of market and economic conditions, calculations of recoverable amounts, and justification for any adjustments made, ensuring compliance with relevant accounting standards.
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Written by
Maham Liaqat
Co-written by
Urooj ArifUrooj is a skilled content writer at Ask Difference, known for her exceptional ability to simplify complex topics into engaging and informative content. With a passion for research and a flair for clear, concise writing, she consistently delivers articles that resonate with our diverse audience.
