Year-end construction in progress revaluation: Should the adjustment be recognized in profit or loss or in asset value?

When revaluing assets in the "Construction in Progress" account at year-end, corporate financial personnel often face a key question: must the revaluation adjustment be recognized in profit or loss (P&L), or can it be directly adjusted against the asset's carrying amount? The answer to this question depends on the applicable accounting standards (such as IFRS or GAAP) and the nature of the revaluation.

I. Two Approaches to Handling Revaluation Adjustments

Under the current accounting framework, the accounting treatment of asset revaluations mainly falls into two scenarios:

• Recognized in profit or loss (P&L): When a revaluation results in a decrease in asset value (impairment) and that impairment was not previously recognized as revaluation surplus, it is usually recognized in current-period profit or loss. In addition, if the revaluation increase represents a "reversal" of a previously recognized impairment loss, it may also be recognized in profit or loss.
• Direct adjustment to asset value (recognized in other comprehensive income or equity): When a revaluation results in an increase in value and the asset has not previously suffered impairment or the impairment has been reversed, the increase is usually recognized in other comprehensive income (OCI) and accumulated in equity under "revaluation surplus," rather than directly in profit or loss.

For construction in progress, since it has not yet reached its intended usable condition, its revaluation treatment requires further analysis based on the nature of the asset and the reason for the revaluation.

II. Special Considerations for Revaluation of Construction in Progress

Construction in progress falls under the "Construction in Progress" category within "Non-current Assets," and its carrying amount reflects accumulated costs (including direct costs, indirect costs, and borrowing costs). When revaluing at year-end, the following situations need to be distinguished:

• Impairment testing: If the revaluation is due to indicators of impairment (such as cost overruns, project suspension, or deteriorating market conditions), impairment testing should be conducted in accordance with Accounting Standard for Business Enterprises No. 8 - Asset Impairment or IAS 36 under IFRS. Impairment losses should be recognized in current-period profit or loss (P&L) and reduce the asset's carrying amount.
• Fair value revaluation: If the enterprise adopts the fair value model (such as for investment property or certain biological assets), revaluation increases or decreases may be directly adjusted against the asset's value, but specific rules vary by standard. For general construction in progress, the cost model is typically used, and fair value revaluation is not performed unless specific exemptions apply.

Therefore, the core of the issue lies in whether the revaluation adjustment constitutes an "impairment" or "reversal of impairment," or whether it represents a change in "revaluation surplus."

III. Standard Guidance and Practical Application

Under International Accounting Standard 16 - Property, Plant and Equipment (IAS 16) of IFRS, when the "revaluation model" is used for asset revaluation, the asset's carrying amount is adjusted to fair value. Revaluation increases are recognized in other comprehensive income and accumulated in equity under "revaluation surplus"; however, if the increase reverses a previously recognized impairment loss (which was recognized in profit or loss), the increase should be recognized in profit or loss to reverse the original impairment loss. Conversely, a revaluation decrease should first reduce the asset's revaluation surplus (if any), with any excess recognized in profit or loss.

For construction in progress, IAS 16 also applies, but it should be noted that construction in progress is generally not revalued unless its fair value can be reliably measured. If an enterprise chooses to revalue, it must follow the above rules.

Under Chinese Accounting Standards (CAS), similar provisions are found in Accounting Standard for Business Enterprises No. 4 - Fixed Assets and its application guidance. Construction in progress is not depreciated before reaching its intended usable condition, but impairment testing is required. If impairment occurs, an impairment provision should be recognized and charged to current-period profit or loss. Revaluation increases are generally not permitted to be recognized unless the asset is transferred to investment property or the fair value model applies.

IV. Conclusion and Recommendations

In summary, when revaluing construction in progress at year-end, whether the adjustment is recognized in profit or loss or directly adjusted against the asset's value cannot be generalized, but should be based on the following judgments:

• If the revaluation results in a decrease in asset value and is of an impairment nature, it must be recognized in profit or loss (P&L), while reducing the asset's carrying amount.
• If the revaluation results in an increase in asset value and the asset has not previously recognized an impairment loss, the increase is usually recognized in other comprehensive income (equity), rather than in profit or loss; however, if the increase reverses an impairment previously recognized in profit or loss, it should be recognized in profit or loss.
• If the enterprise adopts the cost model, revaluation increases are not permitted to be recognized, and only impairment testing is required.

Therefore, financial personnel should first clarify the reason and basis for the revaluation and comply with applicable accounting standards. It is recommended to consult professional auditors or accounting advisors before year-end revaluation to ensure compliant treatment. In addition, regardless of whether the adjustment is recognized in profit or loss or against asset value, the nature, amount, and impact of the revaluation should be fully disclosed in the notes to the financial statements.

In conclusion, the answer to the question is not absolute, but depends on specific facts and standard requirements. Enterprises should make accurate judgments based on their own circumstances.