Asset revaluation and impairment are two distinct concepts that sit close together in the chart of accounts and are frequently confused. Revaluation is a deliberate measurement choice — the entity elects to carry an asset at fair value rather than cost. Impairment is a mandatory write-down when the carrying amount of an asset exceeds its recoverable amount. Both generate journal entries that flow to different parts of the financial statements, and neither has an immediate effect on taxable income — a divergence that creates deferred tax entries that most bookkeepers find uncomfortable but cannot avoid if the entity reports under Australian Accounting Standards.
The Revaluation Model Under AASB 116
AASB 116 Property, Plant and Equipment allows an entity to measure a class of assets using either the cost model or the revaluation model. Once the revaluation model is adopted for a class (e.g., land and buildings), it must be applied to the entire class and revaluations must be carried out with sufficient regularity that the carrying amount does not differ materially from fair value at the reporting date. In practice, a professional independent valuation every 3 to 5 years is typical for property, with directors' assessments or desktop valuations in intervening years.
Financial assets measured at fair value through other comprehensive income (FVOCI) under AASB 9 follow similar equity-reserve logic, as do owner-occupied properties if the revaluation model is elected.
Intangibles (AASB 138) can only be revalued if there is an active market for that class of intangible — a rare condition in practice, which is why internally generated intangibles are generally carried at cost less amortisation.
Journal Entries for Upward Revaluation
When a revaluation increases the carrying amount of an asset, the debit goes to the asset account and the credit goes to Other Comprehensive Income (OCI), which accumulates in a revaluation surplus (or revaluation reserve) in equity. It does not pass through profit or loss.
Example: Land carried at cost $500,000 is revalued to $750,000.
Dr Land 250,000
Cr Revaluation Surplus 250,000
If the same asset had previously been written down through profit and loss (a downward revaluation expensed in prior periods), then the upward revaluation first reverses that prior expense through P&L (up to the amount previously recognised as an expense), with only the excess going to OCI. This sequencing matters — a bookkeeper who credits the entire upward movement to the revaluation surplus when there is a prior P&L charge to reverse has misstated both equity and profit.
Downward Revaluation and Impairment Through P&L
A downward revaluation that takes the asset below its cost (or below the carrying amount before previous P&L charges) is recognised as an expense in profit or loss. It is not an impairment under AASB 136 — it is a revaluation decrement — but the accounting treatment for the P&L portion is the same: debit an expense account (typically "Revaluation Decrement" or "Loss on Revaluation"), credit the asset account.
If the asset has a revaluation surplus balance in equity from prior upward revaluations, the downward movement first reduces that surplus (debit revaluation surplus, credit asset), with any excess taken to P&L. Again, the sequencing is critical.
Impairment Under AASB 136
AASB 136 Impairment of Assets requires an entity to assess at each reporting date whether there is any indication that an asset may be impaired. Indicators include a significant fall in market value, adverse changes in the technological or legal environment, evidence of obsolescence, significant underperformance relative to expectations, or — for listed entities — market capitalisation falling below the carrying amount of net assets.
The impairment loss is the amount by which the carrying amount exceeds the recoverable amount. Recoverable amount is the higher of fair value less costs of disposal and value in use (the present value of future cash flows expected from the asset).
Impairment losses are recognised in profit or loss unless the asset has a revaluation surplus, in which case the impairment is first charged against the surplus.
For cash-generating unit (CGU) impairment allocations, goodwill is allocated to CGUs and tested annually regardless of whether indicators are present.
Goodwill Impairment
Goodwill cannot be amortised under AASB 3 and AASB 136 (unlike under the pre-2005 rules) — it must be tested for impairment at least annually. The test compares the carrying amount of the CGU (including goodwill) to its recoverable amount.
If the carrying amount of the CGU exceeds its recoverable amount, the impairment loss is allocated first to goodwill, then pro-rata to other assets in the CGU (but not below the higher of their individual fair value less costs to sell and value in use). Once goodwill is impaired, the impairment cannot be reversed in subsequent periods — unlike for most other assets where AASB 136 allows reversal if recoverable amount subsequently increases.
The journal entry for a goodwill impairment:
Dr Impairment Loss — Goodwill [amount]
Cr Accumulated Impairment — Goodwill [amount]
Tax vs Accounting Divergence and Deferred Tax
This is where many bookkeepers feel the ground shift under them. Asset revaluations — whether upward or downward — do not affect taxable income in the period they are recognised for accounting purposes. The ATO taxes gains and losses on assets when they are disposed of, not when they are revalued. This creates a timing difference that generates a deferred tax liability (for upward revaluations) or deferred tax asset (for impairments, subject to probability of recovery).
For the upward revaluation of land from $500,000 to $750,000: the accounting carrying amount is now $750,000 but the tax base remains $500,000. The temporary difference is $250,000. At the corporate tax rate of 25% (for base rate entities), the deferred tax liability is $62,500.
Dr Revaluation Surplus (equity) 62,500
Cr Deferred Tax Liability 62,500
The deferred tax entry reduces the net revaluation surplus — so the net equity impact is $250,000 × 75% = $187,500, not $250,000. This is correct accounting under AASB 112. Bookkeepers who post the full $250,000 to revaluation surplus and omit the deferred tax liability have overstated equity.
For impairment losses recognised through P&L: if the impairment loss is deductible for tax purposes (which depends on the nature of the asset and the circumstances — many impairment losses are not immediately deductible), a deferred tax asset arises. Goodwill impairment, however, is typically not deductible for tax at all — and therefore creates no deferred tax asset.
When to Flag an Impairment Review
As a bookkeeper, you are not expected to prepare a formal impairment assessment (that requires the entity's management and potentially an independent valuer), but you should know when to raise the issue.
Flag an impairment review when: the entity reports operating losses for two or more consecutive periods with assets tied to that business unit; a major customer account for a significant asset is lost; a regulatory change affects the asset's utility; property market data suggests fair values have fallen materially below carrying amounts; or a related entity's acquisition of a similar business implies a multiple well below the carrying amount of goodwill in the books.
The practical trigger for the bookkeeper is simpler: if the net book value of the entity's assets looks implausible given what you know about the business — revenue declining, customer base eroding, machinery sitting idle — raise it with the directors before finalising the accounts. An impairment that goes unrecognised until the audit is costlier for everyone than one caught during month-end review.