What is the Difference Between Revaluation and Impairment?
🆚 Go to Comparative Table 🆚Revaluation and impairment are both processes related to the valuation of assets in accounting, but they serve different purposes and have distinct characteristics. Here are the main differences between the two:
- Purpose: Revaluation is an upward or downward adjustment of an asset's carrying amount to reflect its fair value, while impairment involves writing down the value of an asset when its market value falls below its carrying amount.
- Direction of Adjustment: Revaluation can increase or decrease the value of an asset, depending on the change in its fair value. In contrast, impairment always refers to a decrease in the value of an asset, as it is written down to its recoverable amount.
- Accounting Treatment: Revaluation affects the balance sheet and other comprehensive income, as the change in an asset's value is reflected in the revaluation reserve, which is then accumulated in other comprehensive income. Impairment, on the other hand, results in a reduction in the carrying amount of the asset on the balance sheet and a loss reported in the income statement.
- Frequency: Revaluation of assets is carried out at regular intervals to ensure that the financial statements present a true and fair view of the business's assets. Impairment occurs when an asset's carrying amount is more than its recoverable amount, and it is recognized whenever there is an indication of impairment.
In summary, revaluation is a process that adjusts an asset's carrying amount based on its fair value, while impairment refers to writing down the value of an asset when its market value falls below its carrying amount due to a decline in its recoverable amount.
Comparative Table: Revaluation vs Impairment
Revaluation and impairment are two methods used to update the value of fixed assets in accounting. Here is a table summarizing the differences between the two:
| Revaluation | Impairment |
|---|---|
| Involves an upward or downward adjustment of an asset's value based on its true market value | Involves a downward adjustment of an asset's value when its market value falls, indicating a loss in value |
| Can increase or decrease the carrying value of an asset | Only decreases the carrying value of an asset |
| Helps maintain accurate asset values through day-to-day activities | Typically occurs as a one-time expense charge due to an unexpected decrease in an asset's value |
| Revaluation reserve is used to record value fluctuations | Write-downs or impairments are used to record value decreases |
In summary, revaluation can adjust an asset's value upwards or downwards based on its true market value, while impairment only refers to a downward adjustment of an asset's value when its market value falls.
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