Many enterprises in Vietnam hold factories, offices, buildings and machinery whose market values far exceed their recorded costs. However, under Vietnam’s current accounting regulations, these assets continue to be carried at cost less accumulated depreciation, without recognising any increase arising from the difference between that amount and fair value. IAS 16 permits another option for measurement after initial recognition: the revaluation model, under which an asset is carried at its fair value at the date of the revaluation.
Key conclusions
- After initial recognition, IAS 16.29 permits an entity to choose either the cost model or the revaluation model for each class of assets, and the selected policy must be applied consistently to all assets within that class (IAS 16.36), thereby preventing selective revaluation of only certain assets.
- A revaluation increase is recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus, except to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss, in which case the reversal is first recognised in profit or loss (IAS 16.39); only the remaining amount after that reversal is recognised as a revaluation surplus.
- A revaluation decrease is first recognised in other comprehensive income to the extent of any existing credit balance in the revaluation surplus in respect of that same asset (IAS 16.40); any remaining decrease is then recognised in profit or loss.
- A revaluation surplus may be transferred directly to retained earnings, but must not be reclassified through profit or loss, either progressively based on the annual incremental depreciation or in full when the asset is disposed of (IAS 16.41).
- Circular No. 99/2025/TT-BTC and VAS 03 permit only the cost model; fixed assets may be revalued only in certain specifically permitted circumstances (for example, pursuant to a decision of the State or upon equitisation, etc.). Accordingly, electing to apply the revaluation model gives rise to a difference that must be adjusted when converting to IFRS.
How the Revaluation Model Works under IAS 16
Conditions for Election and the Principle of Application by Class of Assets
After initial recognition at cost, IAS 16.29 permits an entity to choose as its accounting policy either the cost model or the revaluation model and to apply that policy to an entire class of property, plant and equipment. Under the revaluation model, an asset whose fair value can be measured reliably is carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses (IAS 16.31).
The requirement in IAS 16.36 to apply the policy to an entire class of assets is important. If the revaluation model is selected, the entity must apply it consistently to all assets in the same class. This requirement exists because, if individual assets could be revalued separately, an enterprise might choose to revalue only assets that have increased in value while retaining cost for assets that have decreased in value, resulting in a biased financial picture. The class-based requirement eliminates this selective approach. IAS 16.37 gives examples of classes of assets such as land, buildings, machinery and motor vehicles. Items within a class are revalued simultaneously to avoid reporting a mixture of values as at different dates (IAS 16.38). However, a class of assets may be revalued on a rolling basis, provided that revaluation of the entire class is completed within a short period and the revaluations are kept up to date.
Methods for Determining the Fair Value of Property, Plant and Equipment
The revaluation model may be applied only to assets whose fair value can be measured reliably (IAS 16.31). IAS 16 itself does not prescribe in detail how fair value is measured; the measurement principles are referred to IFRS 13 Fair Value Measurement. Accordingly, when implementing the revaluation model for property, plant and equipment (PPE), an enterprise must determine fair value in accordance with the IFRS 13 framework rather than using a self-selected basis of value.
Fair Value Is an Exit Price Based on Market Participant Assumptions
Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date (IFRS 13.9). It is an exit price, meaning the selling price of the asset, rather than the cost incurred by the enterprise to acquire it or the entity-specific value in use. In practice, this means that fair value is determined from the perspective of market participants, not on the basis of the entity’s own intention to hold or use the asset. Even if an enterprise intends to use a production line until the end of its useful life, the line must still be valued at the amount a market participant would be willing to pay, rather than by reference to the internal benefits the entity expects to derive from it.
The Highest and Best Use Assumption for Non-financial Assets
Property, plant and equipment (PPE) are non-financial assets and, therefore, the highest and best use assumption in IFRS 13.27–29 must be applied when measuring fair value. Highest and best use is the use that market participants would select to maximise the value of the asset. That use must be physically possible, legally permissible and financially feasible. An asset’s current use is presumed to be its highest and best use unless market evidence or other factors suggest that a different use would maximise the asset’s value from the perspective of market participants. This determination does not depend on the enterprise’s entity-specific intended use; an enterprise may not use an alternative use merely because, in theory, it could generate a higher value.
This point has direct implications for land in Vietnam. For example, a parcel of land currently used as a factory may be located in an area where the zoning plan permits commercial use. The fact that the zoning plan permits commercial use supports only the condition of being ‘legally permissible’ and is not sufficient, by itself, to conclude that the land must be valued on the basis of commercial use. This is an area requiring professional judgement and evidence that the change of use is legally feasible.
To determine that commercial use is the highest and best use, there must be evidence that market participants could make the change of use both physically and legally, and that the commercial use would generate sufficient income or cash flows to provide the return required by market participants after taking into account all conversion costs. Fair value is determined on the basis of commercial use only when that use satisfies all of the above conditions and maximises the value of the asset, even if the enterprise still intends to continue using the asset as a factory.
IFRS 13.31 also distinguishes between a valuation premise under which an asset is used in combination with other assets and one under which it is used on a stand-alone basis.
Three Valuation Approaches and the Types of Assets Suited to Each
IFRS 13.61–62 requires valuation techniques that are appropriate in the circumstances and that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. Three approaches are commonly used, with application guidance in IFRS 13.B5–B11:
| Approach | Basis of valuation | Types of PPE commonly valued using the approach | Typical input level |
| Market | Uses prices and other relevant information generated by market transactions involving identical or comparable assets, adjusted for differences (IFRS 13.B5–B7) | Land; standard office buildings and warehouses; commonly traded motor vehicles | Generally Level 2 |
| Cost | Uses the current replacement cost required to replace the service capacity of an asset, less physical deterioration and functional and economic obsolescence, referred to as depreciated replacement cost (IFRS 13.B8–B9) | Specialised factories; specialised machinery and production lines for which no active transaction market exists | Generally Level 3 |
| Income | Converts future cash flows or income relating to the asset into a current amount (IFRS 13.B10–B11) | Assets that generate identifiable cash flows, for example certain operating facilities linked to contracts | Generally Level 3; occasionally Level 2 |
For most PPE held by Vietnamese enterprises, ordinary real estate is valued using the market approach, whereas specialised machinery and factory buildings—which do not have a market for comparable assets—often require the depreciated replacement cost method. The lack of market data for specialised assets is a common reason why fair value measurements for machinery fall within Level 3, resulting in more detailed and complex disclosure requirements.
Relationship with Vietnamese Valuation Standards and Valuation Certificates
In practice, enterprises often engage a valuation organisation to issue a valuation certificate as the basis for determining fair value. The system of Vietnamese Valuation Standards issued under the 2023 Law on Prices is structured around the same three approaches as IFRS 13: Circular No. 32/2024/TT-BTC issues standards on the market, cost and income approaches; Circular No. 42/2024/TT-BTC prescribes the real estate valuation standard (effective from 05/8/2024); and Circular No. 30/2024/TT-BTC prescribes bases of value for valuation. The similarity of the approaches makes it practicable to use a valuation certificate for IFRS financial reporting purposes, but it does not mean that the two frameworks are identical.
An enterprise should check two important matters before using a valuation certificate as evidence of fair value under IFRS 13. First, the basis of value stated in the certificate must be compatible with fair value under IFRS 13—that is, an exit price based on market assumptions and highest and best use—and not forced liquidation value, value to a particular owner or another non-market basis. Second, the legal requirements of the 2023 Law on Prices must be met: the valuation purpose stated in the certificate must be appropriate for financial reporting, and the certificate must remain valid when it is used.
Disclosure Requirements for Valuation Techniques and Inputs
When applying the revaluation model, an enterprise makes disclosures under both IAS 16 and IFRS 13. IAS 16.77 requires disclosure of the effective date of the revaluation, whether an independent valuer was involved, the carrying amount that would have been recognised under the cost model for each class of assets, changes in the surplus during the period and any restrictions on distributing the surplus to shareholders. IFRS 13.91–99 adds disclosures, by class of asset, about valuation approaches, inputs and the level within the fair value hierarchy. Recurring Level 3 measurements also require more extensive disclosures about unobservable inputs and the sensitivity of fair value to those assumptions (IFRS 13.93). Enterprises often underestimate this disclosure burden when first adopting the revaluation model for specialised assets.
Frequency of Revaluations
IAS 16.31 requires revaluations to be made with sufficient regularity to ensure that the carrying amount does not differ materially from fair value at the end of the reporting period. The frequency depends on changes in the fair value of each class. IAS 16.34 states that annual revaluation may be necessary for assets experiencing significant and volatile changes in fair value, whereas revaluation every three or five years may be sufficient for assets with only insignificant changes in fair value.
Order of Recognition for Revaluation Increases and Revaluation Decreases
The recognition mechanism must follow the prescribed order for each individual asset:
When an asset’s carrying amount increases as a result of a revaluation, the increase is recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus. Exception: if the increase reverses a revaluation decrease of the same asset previously recognised in profit or loss, the corresponding reversal is first recognised in profit or loss, and only any excess is recognised in other comprehensive income (IAS 16.39).
When an asset’s carrying amount decreases as a result of a revaluation, the decrease is recognised in profit or loss. Exception: if that same asset has an accumulated credit balance in the revaluation surplus in equity, the decrease is first recognised directly against that surplus, and only the amount exceeding the remaining surplus is recognised in profit or loss (IAS 16.40).
The underlying principle is symmetry at the level of each asset: an unrealised gain does not pass through profit or loss, but an amount previously recognised as a loss in profit or loss must also return to profit or loss when reversed. The surplus must be tracked for each individual asset and must not be offset across assets.
Two Techniques for Adjusting Accumulated Depreciation at the Date of Revaluation
IAS 16.35 permits two presentation techniques, both of which restate the carrying amount to fair value:
Proportionate restatement technique: the gross carrying amount and accumulated depreciation are adjusted simultaneously using the same factor, calculated as fair value divided by carrying amount, so that the net carrying amount equals fair value.
Elimination technique: accumulated depreciation is eliminated against the gross carrying amount, after which the resulting net amount is restated to fair value. This technique is often used for buildings.
Both techniques result in the same net carrying amount and the same revaluation surplus; the only difference is the presentation of the gross carrying amount and accumulated depreciation in the notes.
Treatment of a Revaluation Surplus as It Is Realised
A revaluation surplus included in equity may be transferred to retained earnings when the surplus is realised (IAS 16.41). Realisation occurs in two ways: part of the surplus is realised progressively as the enterprise uses the asset, equal to the difference between depreciation based on the revalued amount and depreciation based on the asset’s original cost; the balance is fully realised when the asset is disposed of. In both cases, the transfer is made directly from revaluation surplus to retained earnings and does not pass through profit or loss. A progressive transfer of the revaluation surplus to retained earnings is an accounting policy choice, not a mandatory requirement.
On disposal, the gain or loss is determined as the difference between the net disposal proceeds and the carrying amount at the date of disposal and is recognised in profit or loss (IAS 16.67, 16.71). Any remaining revaluation surplus relating to the asset is transferred to retained earnings and is not included in the gain on disposal recognised in profit or loss (IAS 16.41).
The revaluation surplus is not transferred through profit or loss because it does not arise from operating activities or from a sale transaction; it merely represents an increase in the asset’s carrying amount at the date of revaluation. As the enterprise continues to use the asset, the surplus is progressively regarded as realised through the additional depreciation. When the asset is disposed of, the remaining surplus is regarded as fully realised. However, profit for the period has already been affected by depreciation based on the revalued amount or has already reflected the gain or loss on disposal based on the asset’s new carrying amount. Therefore, recognising the revaluation surplus in profit or loss would risk reflecting the same increase in value twice. IAS 16 therefore permits this amount to be transferred directly from revaluation surplus to retained earnings—that is, as a transfer between components of equity that does not increase profit for the period in which the transfer is made.
Can an Entity Change Between the Revaluation Model and the Cost Model?
Yes, but this is a change in accounting policy under IAS 8 rather than an election that may be changed freely each year, and changes in the two directions are not accounted for in the same way. A change in accounting policy is permitted only when required by an IFRS Accounting Standard or when the change results in the financial statements providing reliable and more relevant information about the effects of transactions on the enterprise’s financial position and financial performance (IAS 8.14). In other words, consistency is the default and change is an exception that must be properly justified. An enterprise may not switch models simply to achieve a desired presentation in a particular period—for example, by increasing assets and equity and then reverting to the cost model in the following year. Because of the ‘more relevant’ condition, the two directions of change are not equally easy to justify: changing to the revaluation model is often regarded as providing more relevant information and is therefore easier to support, whereas changing back to the cost model is more difficult to demonstrate as providing more relevant information.
Change from the cost model to the revaluation model: A change to the revaluation model is generally accepted because it provides more relevant information about asset values. IAS 8 generally requires changes in accounting policies to be applied retrospectively. However, the initial application of a policy to revalue property, plant and equipment (or intangible assets) is an exception that is accounted for as a revaluation in accordance with IAS 16 rather than retrospectively under IAS 8 (IAS 8.17). This means that an enterprise does not restate prior periods as if the revaluation model had always been applied. Instead, it begins revaluing from the period of change and recognises the resulting difference in accordance with the normal mechanics of IAS 16 (increases in other comprehensive income and decreases in the prescribed order of offset).
Change from the revaluation model back to the cost model: This direction is more difficult to justify. Reverting from fair value to cost is generally considered to provide less relevant information and therefore very rarely satisfies this condition. If the change is nevertheless made, it is, in principle, applied retrospectively under IAS 8 as an ordinary change in accounting policy.
Finally, the class-based restriction must be remembered: the selection or change of model is made at the level of each class of assets and must be applied consistently to all assets in that class (IAS 16.29, 16.36). A model therefore cannot be changed for only a few individual assets while the previous model is retained for other assets in the same class.
VAS and IFRS comparison
| Criterion | Vietnamese accounting requirements | IFRS requirements | Conversion implications |
| Subsequent measurement model | Only the cost model is applied; fixed assets are carried at cost less accumulated depreciation. | Unlike Vietnamese requirements, an entity may choose either the cost model or the revaluation model (IAS 16.29) | If the revaluation model is selected, the carrying amounts of assets and equity change; a revaluation surplus may arise in the statement of financial position |
| Conditions for revaluation | Revaluation is permitted only in certain prescribed circumstances, such as pursuant to a decision of the State, a contribution of capital, a change in ownership form, division, separation, consolidation or merger. | Unlike Vietnamese requirements, an enterprise may elect the revaluation policy when fair value can be measured reliably (IAS 16.31) | An internal periodic valuation process must be established |
| Scope of application | VAS does not provide a policy choice and therefore does not prescribe application by class | The model must be applied to the entire class of assets; individual assets may not be revalued selectively (IAS 16.36) | Assets must be classified into classes and revalued consistently by class |
| Frequency of value updates | VAS does not prescribe a frequency (because market-based revaluation is not permitted) | Revaluations must be made with sufficient regularity to ensure that the carrying amount does not differ materially from fair value; they may be required annually or every three to five years depending on volatility (IAS 16.31, 16.34) | Periodic valuation costs arise, together with disclosure requirements concerning the date and method of valuation |
| Recognition of a revaluation increase | VAS does not prescribe accounting for voluntary revaluation. For circumstances in which revaluation is permitted: + when revaluation is pursuant to a decision of the State, the increase is credited to Account 412—Difference from Revaluation of Assets, within equity, and is not recognised in profit or loss. + when assets are contributed as capital or an enterprise is reorganised, the increase is recognised as other income. | Unlike Vietnamese requirements, the increase is recognised in other comprehensive income, except to the extent that it reverses a decrease previously recognised in profit or loss (IAS 16.39) | Other comprehensive income and the surplus within equity increase; profit for the period does not increase except to the extent that a decrease previously recognised in profit or loss is reversed. |
| Recognition of a revaluation decrease | VAS does not prescribe accounting for voluntary revaluation For circumstances in which revaluation is permitted: + when revaluation is pursuant to a decision of the State, the decrease is debited to Account 412—Difference from Revaluation of Assets, within equity, and is not recognised in profit or loss. + when assets are contributed as capital or an enterprise is reorganised, the decrease is recognised as other expense. | Unlike Vietnamese requirements, the decrease is first recognised against the remaining revaluation surplus relating to the asset, and only any excess is recognised in profit or loss (IAS 16.40) | Profit for the period may decrease if no revaluation surplus remains for the asset |
| Treatment of the revaluation surplus | Where a permitted revaluation gives rise to a revaluation surplus, the balance is dealt with in accordance with a decision of the competent authority, generally by adjusting the owner’s contributed capital | The surplus may be transferred directly to retained earnings annually based on the incremental depreciation or in full on disposal, without passing through profit or loss (IAS 16.41) | A transfer within equity; no effect on profit. |
Illustrative Examples of Applying the Revaluation Model
Scenario 1: Illustration of the Recognition of a Revaluation Increase
Company A is a packaging manufacturer. Currency unit: VND million.
Facts:
- Cost of the factory building: 20,000; available for use on 01/01/20X0. The enterprise elects to apply the revaluation model.
- Straight-line depreciation over 20 years, equivalent to 1,000 per year.
- At 31/12/20X4, after 5 years of depreciation, the carrying amount is 20,000 less 5,000, or 15,000.
- Fair value at 31/12/20X4, based on a valuation certificate, is 18,000. The revaluation increase is 3,000.
The journal entries below disregard the deferred tax effects for simplicity.
Step 1: Recognise the revaluation increase at 31/12/20X4.
If the elimination technique is applied: eliminate all accumulated depreciation against the gross carrying amount, then increase the net amount to fair value:
Dr Accumulated depreciation (B/S) 5,000
Cr Gross carrying amount of factory building (B/S) 2,000
Cr Revaluation increase (OCI) 3,000
After the entry, the gross carrying amount is 18,000, accumulated depreciation is 0 and the carrying amount is 18,000.
If the proportionate restatement technique is applied: using a factor of 18,000 divided by 15,000, or 1.2, adjust the gross carrying amount and accumulated depreciation simultaneously:
Dr Gross carrying amount of factory building (B/S) 4,000
Cr Accumulated depreciation (B/S) 1,000
Cr Revaluation increase (OCI) 3,000
Where: adjustment to the gross carrying amount of the factory building = 20,000 x 1.2 – 20,000 = 4,000; adjustment to accumulated depreciation = 5,000 x 1.2 – 5,000 = 1,000.
After the entry, the gross carrying amount is 24,000, accumulated depreciation is 6,000 and the carrying amount is 18,000.
Both techniques result in the same carrying amount of 18,000 and the same surplus of 3,000.
Step 2: Recognise depreciation based on the revalued amount and transfer the surplus for each year from 20X5 onwards.
Assume that the enterprise elects to transfer the revaluation surplus to retained earnings.
The remaining useful life is 15 years. The new depreciation charge is 18,000 ÷ 15 = 1,200 per year. Depreciation based on original cost was 1,000. The difference of 200 per year is the portion of the surplus realised through use and is transferred to retained earnings:
Dr Depreciation expense (P/L) 1,200
Cr Accumulated depreciation (B/S) 1,200
Dr Revaluation surplus (B/S) 200
Cr Retained earnings (B/S) 200
Step 3: On disposal, assumed to take place on 01/01/20X8.
The illustration below continues to use the elimination technique applied in Step 1 (gross carrying amount of 18,000 and accumulated depreciation restarting from 0). If the proportionate restatement technique were applied, the gross carrying amount and accumulated depreciation in the disposal entry would differ, but the carrying amount and gain on disposal would remain unchanged.
The period from the date of revaluation to the date of disposal is 3 years (20X5, 20X6 and 20X7). Accumulated depreciation for this period is 3 x 1,200 = 3,600. The carrying amount at the date of disposal is 18,000 – 3,600 = 14,400. The surplus transferred is 3 x 200 = 600, leaving a remaining surplus of 3,000 – 600 = 2,400.
Assume that the factory building is sold for 15,000.
Gain on disposal: 15,000 – 14,400 = 600.
Dr Cash (B/S) 15,000
Dr Accumulated depreciation (B/S) 3,600
Cr Gross carrying amount of factory building (B/S) 18,000
Cr Gain on disposal of asset (P/L) 600
Transfer the remaining surplus to retained earnings without passing through profit or loss:
Dr Revaluation surplus (B/S) 2,400
Cr Retained earnings (B/S) 2,400
Scenario 2: Illustration of the Order of Recognition Between Profit or Loss and Other Comprehensive Income over Multiple Periods
Company B is a real estate enterprise. Currency unit: VND million.
Facts:
Input data:
- On 01/01/20X1, the company made available for use a building used as an office with a cost of 5,000, a useful life of 25 years and straight-line depreciation. The company elects to apply the revaluation model to this asset and similar assets.
- Revaluations in selected years are as follows:
| Year | Opening carrying amount | Depreciation for the year | Closing carrying amount before revaluation | Revaluation difference for the year | Closing carrying amount after revaluation |
| 20X1 | 5,000 | 200 | 4,800 | (800) | 4,000 |
| 20X2 | 4,000 | 170 | 3,830 | 700 | 4,530 |
| 20X3 | 4,530 | 200 | 4,330 | 500 | 4,830 |
| 20X4 | 4,830 | 220 | 4,610 | (900) | 3,710 |
Journal entries for the revaluation differences during the year (disregarding deferred tax effects for simplicity):
Year 20X1—revaluation decrease of 800: The closing carrying amount before revaluation of 4,800 equals the cost-model basis. The asset has no revaluation surplus and therefore the entire decrease is recognised in profit or loss (IAS 16.40):
Dr Loss on revaluation of asset (P/L) 800
Cr Carrying amount of office building (B/S) 800
After 20X1: carrying amount 4,000; below the cost-model basis of 4,800 by 800; surplus 0.
Year 20X2—revaluation increase of 700. A loss had previously been recognised in profit or loss. The carrying amount before revaluation of 3,830 remains below the cost-model basis of 4,600 (= 5,000 – 200 x 2), and after the increase of 700 to 4,530 it still does not exceed the ceiling (the hypothetical carrying amount if the asset had never been revalued). Accordingly, the entire increase of 700 is recognised in profit or loss as a reversal (IAS 16.39):
Dr Carrying amount of office building (B/S) 700
Cr Income from reversal of revaluation decrease (P/L) 700
After 20X2: carrying amount 4,530; below the cost-model basis of 4,600 by 70; surplus 0.
Year 20X3—revaluation increase of 500. The carrying amount before revaluation of 4,330 remains below the cost-model basis of 4,400 by 70. The increase first reverses 70 through profit or loss to bring the carrying amount up to the ceiling; the excess of 500 less 70, or 430, is recognised in other comprehensive income (IAS 16.39):
Dr Carrying amount of office building (B/S) 500
Cr Income from reversal of revaluation decrease (P/L) 70
Cr Revaluation increase (OCI) 430
After 20X3: carrying amount 4,830; above the cost-model basis of 4,400 by 430; surplus 430.
Year 20X4—revaluation decrease of 900. During the year, the incremental depreciation of 20 (depreciation of 220 on the revalued amount compared with 200 on the cost basis) is transferred from revaluation surplus to retained earnings, reducing the surplus balance from 430 by 20 to 410. This equals the amount by which the pre-revaluation carrying amount of 4,610 exceeds the cost-model basis of 4,200. The decrease of 900 is first recognised against the asset’s remaining revaluation surplus of 410 in other comprehensive income; the excess of 900 less 410, or 490, is recognised in profit or loss (IAS 16.40):
Journal entry to transfer the realised revaluation surplus:
Dr Revaluation surplus (B/S) 20
Cr Retained earnings (B/S) 20
Journal entry for the revaluation difference:
Dr Revaluation decrease (OCI) 410
Dr Loss on revaluation of asset (P/L) 490
Cr Carrying amount of office building (B/S) 900
After 20X4: carrying amount 3,710; below the cost-model basis of 4,200 by 490; surplus 0.
Summary separating profit or loss from other comprehensive income:
| Year | Fair value | Carrying amount before revaluation | Cost-model basis (ceiling) | Difference | Recognised in profit or loss | Recognised in other comprehensive income | Recognised in retained earnings | Closing revaluation surplus |
| 20X1 | 4,000 | 4,800 | 4,800 | −800 | −800 (loss) | 0 | 0 | 0 |
| 20X2 | 4,530 | 3,830 | 4,600 | +700 | +700 (reversal) | 0 | 0 | 0 |
| 20X3 | 4,830 | 4,330 | 4,400 | +500 | +70 (reversal) | +430 | 0 | 430 |
| 20X4 | 3,710 | 4,610 | 4,200 | −900 | −490 (loss) | −410 | +20 | 0 |
The example demonstrates the role of the cost-model ceiling when depreciation is involved. In 20X2, although a loss of 800 had been recognised in 20X1, the entire increase is recognised in profit or loss as a reversal because the carrying amount does not exceed the ceiling. In 20X3, the increase is recognised in profit or loss only up to the ceiling—70—and the remainder is recognised in other comprehensive income. In 20X4, the decrease is first recognised against the remaining surplus relating to that same asset, and only the amount that reduces the carrying amount below the cost-model ceiling is recognised in profit or loss. This order is applied at the level of each individual asset, without offsetting across assets.
Adjustments on conversion from VAS to IFRS and deferred tax
When an enterprise applies the revaluation model, the carrying amount of an asset under IFRS differs from its corporate income tax base. In Vietnam, the corporate income tax base is not determined in accordance with IFRS; it continues to be based on cost and tax-deductible depreciation under the tax regulations. Consequently, almost every revaluation adjustment gives rise to a temporary difference. This is one of the matters most frequently overlooked when preparing IFRS financial statements.
Under IAS 12.61A, deferred tax arising from a revaluation is recognised in other comprehensive income, in the same place as the revaluation. Accordingly, the surplus presented in equity is a net-of-tax amount. As the surplus is progressively realised through depreciation, the corresponding deferred tax also reverses, and IAS 12.64 requires the transfer from revaluation surplus to retained earnings to be made net of tax.
The journal entries below are based on the example in Scenario 1, using an assumed corporate income tax rate of 20%.
Step 1: VAS figures and the conversion adjustment to the carrying amount at 31/12/20X4.
Under VAS, the factory building is accounted for using the cost model: cost is 20,000; after 5 years of depreciation at 1,000 per year, accumulated depreciation is 5,000 and the carrying amount is 15,000. Assume that this recognition and depreciation are consistent with the tax regulations. The tax base is therefore also 15,000, equal to the VAS carrying amount, and no temporary difference has arisen in the VAS accounting records. On conversion to IFRS and application of the revaluation model, the asset is increased to its fair value of 18,000:
| Item at 31/12/20X4 | Under VAS (cost model) | Under IFRS (revaluation model) |
| Gross carrying amount | 20,000 | 18,000 |
| Accumulated depreciation | 5,000 | 0 |
| Carrying amount | 15,000 | 18,000 |
| Tax base | 15,000 | 15,000 |
| Taxable temporary difference | 0 | 3,000 |
The conversion adjustment increases the carrying amount from the VAS basis to fair value under IFRS and is presented using the elimination technique as in Scenario 1 (eliminating accumulated depreciation against the gross carrying amount, then increasing the net amount to fair value):
Dr Accumulated depreciation—factory building (B/S) 5,000
Cr Gross carrying amount—factory building (B/S) 2,000
Cr Revaluation increase (OCI) 3,000
After the entry, the gross carrying amount is 18,000, accumulated depreciation is 0 and the carrying amount is 18,000; the pre-tax revaluation surplus is 3,000. This IFRS carrying amount forms the basis for calculating deferred tax in the next step.
Step 2: Recognise deferred tax on the revaluation increase at 31/12/20X4.
The taxable temporary difference is the IFRS carrying amount of 18,000 less the tax base of 15,000, or 3,000. The deferred tax liability is 3,000 x 20% = 600 and is recognised directly against the surplus because the revaluation is recognised in other comprehensive income (IAS 12.61A):
Dr Revaluation increase (OCI) 600
Cr Deferred tax liability (B/S) 600
After the entry, the net surplus is 3,000 – 600 = 2,400.
Step 3: Annual adjustments
Under IFRS, depreciation on the revalued amount of 18,000 over the remaining 15 years is 1,200 per year, whereas depreciation under VAS and deductible for tax purposes is 1,000 per year. The conversion adjustment recognises the additional depreciation difference of 200 per year:
Dr Depreciation expense (P/L) 200
Cr Accumulated depreciation—factory building (B/S) 200
This depreciation difference of 200 reduces the taxable temporary difference by 200 each year. Accordingly, 200 x 20% = 40 of the deferred tax liability is reversed through profit or loss:
Dr Deferred tax liability (B/S) 40
Cr Deferred tax expense (P/L) 40
The net surplus realised during the year is 200 – 40 = 160 and is transferred to retained earnings:
Dr Revaluation surplus (B/S) 160
Cr Retained earnings (B/S) 160
Step 4: Disposal on 01/01/20X8.
The factory building is sold for 15,000. Under VAS, the carrying amount at the date of disposal is 12,000 (cost of 20,000 less accumulated depreciation for 8 years of 8,000), resulting in a gain on disposal under VAS of 3,000. Under IFRS, the carrying amount is 14,400 (revalued amount of 18,000 less 3 years’ accumulated depreciation of 3,600), resulting in a gain on disposal under IFRS of only 600. The conversion adjustment reduces the gain on disposal by 2,400, equal to the amount by which the IFRS carrying amount still exceeds the VAS carrying amount (revaluation increase of 3,000 less 3 years of incremental depreciation of 600):
Dr Gain on disposal of asset (P/L) 2,400
Cr Carrying amount of factory building (B/S) 2,400
After 3 years, the remaining deferred tax liability is 600 – 3 x 40 = 480, and the remaining net surplus is 2,400 – 3 x 160 = 1,920.
Reverse the entire remaining deferred tax liability through profit or loss; this offsets the current tax calculated on the gain on disposal determined using the tax basis:
Dr Deferred tax liability (B/S) 480
Cr Deferred tax expense (P/L) 480
Transfer the remaining net surplus to retained earnings:
Dr Revaluation surplus (B/S) 1,920
Cr Retained earnings (B/S) 1,920
Common errors and implementation issues in Vietnam
Selective revaluation of individual assets within a class. Some enterprises revalue only assets that have increased in value, such as office buildings and factories, while retaining cost for other assets in the same class. This approach breaches the requirement in IAS 16.36 to apply the model to the entire class and is commonly challenged by auditors during their review.
Incorrect order of offset between other comprehensive income and profit or loss. When an asset is revalued downwards, accountants sometimes recognise the decrease directly in profit or loss and fail to recognise it first against the remaining surplus relating to that asset. Conversely, when an asset is revalued upwards, they may recognise the increase directly in other comprehensive income without first reversing a loss previously recognised in profit or loss. The order required by IAS 16.39 and 16.40 must be followed for each individual asset.
Reclassification of the surplus to profit or loss on disposal. This error distorts profit for the period. The surplus remaining on disposal may be transferred directly to retained earnings in accordance with IAS 16.41, but it must not be included in the gain on disposal reported in profit or loss.
Omission of deferred tax or recognition in the wrong direction. A revaluation increase gives rise to a deferred tax liability, not a deferred tax asset, and at the date of revaluation that tax is recognised in other comprehensive income rather than in profit or loss. Recognising the wrong direction or omitting the amount results in a misstated surplus and an incorrect deferred tax balance.
Use of a valuation certificate for an inappropriate purpose. Under the 2023 Law on Prices (Law No. 16/2023/QH15), using a valuation certificate that has expired or for a purpose other than its stated valuation purpose is prohibited. A certificate prepared for bank lending or capital contribution purposes may not be appropriate as a basis for fair value in financial statements. The enterprise needs a certificate that is valid when used and issued for the appropriate purpose.
Frequently asked questions
If the revaluation model is selected for the class of buildings and structures, must other classes also use that model?
No. The accounting policy choice is made at the level of each class of assets under IAS 16.29. An enterprise may therefore apply the revaluation model to buildings while retaining the cost model for machinery. The mandatory requirement is consistency within each class.
How often must assets be revalued?
IAS 16 does not prescribe a fixed cycle. Instead, revaluations must be made with sufficient regularity to ensure that the carrying amount does not differ materially from fair value. Assets subject to significant changes in value will generally require annual revaluation, whereas a three-to-five-year cycle may be sufficient for stable assets, supported by the enterprise’s assessment of changes in value between revaluation dates.
If the revaluation model is applied, must the revaluation date always coincide with the end of the reporting period?
No. IAS 16.31 does not require the revaluation date always to coincide with the end of the reporting period; it requires revaluations to be made with sufficient regularity to ensure that the carrying amount does not differ materially from fair value at the end of the reporting period. An enterprise may therefore select a revaluation date before the reporting date, but it must consider changes between the two dates. If those changes are not material, the value at the revaluation date may be used after updating depreciation and making other adjustments relevant to the reporting date. If the changes are material, the enterprise must update the measurement or perform an additional revaluation. For example, for financial statements as at 31/12/2025, a revaluation date of 30/11/2025 may be appropriate if changes through 31/12/2025 are not material; if the market changes significantly during month 12, the value must be updated to the reporting date. A valuation certificate may be issued after the measurement date; its issue date is not the revaluation date.
Is the accounting for a revaluation decrease different from the accounting for impairment under IAS 36?
Yes, and the two must be distinguished from the outset. An ordinary decrease in the fair value of an asset under the revaluation model is accounted for under IAS 16.40, first against any remaining revaluation surplus and then in profit or loss. However, if indicators of impairment exist, the enterprise must apply IAS 36. An impairment loss on a revalued asset is also, in principle, recognised first against the revaluation surplus, but the determination of recoverable amount and the related disclosures are separate requirements of IAS 36. Auditors commonly challenge this boundary, so the cause of the decrease should be clearly identified before the accounting entry is recorded.
Can a valuation certificate prepared for bank lending purposes be used for financial reporting?
Caution is required. A value determined for collateral purposes may use a basis different from fair value under IFRS 13, and the 2023 Law on Prices requires a valuation certificate to be used for its stated purpose. In principle, an enterprise should obtain a certificate prepared for financial reporting purposes that remains valid when it is used.
Selecting and implementing the revaluation model involves numerous decisions concerning asset classification, valuation frequency, techniques for adjusting accumulated depreciation and deferred tax accounting. Our IFRS conversion advisory team can assist enterprises in establishing policies and processes suited to the characteristics of their assets.
This article has been prepared to provide general information and technical guidance only and does not constitute accounting, audit, tax or legal advice for any particular transaction or entity. The figures, assumptions and journal entries in this article are illustrative and should be adapted to the actual circumstances, professional judgements and documentation of each enterprise. We accept no responsibility for any loss arising from the use of the information in this article without appropriate professional advice. For assistance with a specific matter, please contact our IFRS conversion advisory team.
