Can a Right-of-Use Asset Be Revalued Under IFRS 16?
A right-of-use (ROU) asset is not automatically eligible for revaluation simply because the underlying property has increased in market value. Under IFRS 16, the answer depends on which accounting model applies to the relevant asset class and whether the lease meets the investment-property rules.
The default position: cost model
After the commencement date, IFRS 16.29 requires a lessee to measure the ROU asset using the cost model unless the measurement model in IFRS 16.34 or 16.35 applies. In practical terms, the ROU asset is generally carried at its initial cost, less accumulated depreciation and accumulated impairment losses, and adjusted for certain remeasurements of the lease liability.
Paragraph 33 is not the paragraph that establishes the cost-model default. It requires a lessee to apply IAS 36 impairment requirements to ROU assets, subject to the relevant exceptions. That distinction matters when documenting an accounting position or responding to an audit query.
Exception 1: investment property
IFRS 16.34 addresses an ROU asset that meets the definition of investment property under IAS 40. If the lessee applies the IAS 40 fair value model to its investment property, it must also apply that fair value model to qualifying ROU assets.
Under the IAS 40 fair value model, changes in fair value are recognised in profit or loss, not in other comprehensive income. Depreciation is not charged on investment property measured under that model. This is different from an IAS 16 revaluation, where an increase will generally be recognised in OCI and subsequent depreciation continues.
The wording is conditional. IFRS 16.34 does not mean that every leased property is automatically measured at fair value. The asset must first meet the IAS 40 definition of investment property, and the entity’s IAS 40 measurement policy must be considered. A property used in the entity’s own operations is normally owner-occupied rather than investment property, even if it is held under a lease.
Exception 2: revaluation model under IAS 16
IFRS 16.35 permits a lessee to apply the IAS 16 revaluation model to ROU assets that relate to a class of property, plant and equipment for which the lessee applies the IAS 16 revaluation model.
This is not an asset-by-asset opportunity to revalue one attractive lease. The election relates to all ROU assets connected with that class. IAS 16.37 also requires revaluations to be applied to an entire class of property, plant and equipment, not selected individual assets within the class. Therefore, an entity cannot revalue an ROU asset in a class that it otherwise measures under the cost model merely to increase its reported asset balance.
When the IAS 16 revaluation model applies, the ROU asset is carried at its revalued amount, less subsequent accumulated depreciation and impairment. A revaluation increase is generally recognised in OCI and accumulated in equity as a revaluation surplus, subject to the requirement to reverse any previous revaluation decrease recognised in profit or loss. Subsequent depreciation is based on the revalued carrying amount.
What happens to the lease liability?
Revaluing the ROU asset does not automatically revalue the lease liability. Under IFRS 16.36, the lease liability is subsequently measured by increasing it for interest, reducing it for lease payments, and adjusting it when the standard requires a lease remeasurement. A change in the property’s fair value is not, by itself, a lease-liability remeasurement event.
This can create a difference between the revalued ROU asset and the lease liability. That difference is not, by itself, evidence of an error; it reflects the fact that the two balances follow different measurement requirements.
Practical conclusion for UAE businesses
Before adopting a revaluation approach, document four points: whether the property is investment property under IAS 40, which IAS 40 policy is applied, which IAS 16 class the ROU asset belongs to, and whether that entire class is already subject to the revaluation model. The accounting policy should also explain the treatment of OCI, depreciation, impairment and the continuing measurement of the lease liability.
The safe answer is therefore: yes, an ROU asset can be revalued under IFRS 16, but only through the specific IAS 40 or IAS 16 routes. A general upward market valuation is not enough.
FSH Financial Consultants FZE helps UAE businesses apply IFRS 16, IAS 16 and IAS 40 consistently and maintain audit-ready accounting documentation.
