1. INTRODUCTION
Saudi Arabia’s asset valuation practices have evolved significantly over the years. In 2016, CMA mandated that listed companies should apply the cost model for items of PPE and intangible assets for an initial three-year period from the date of application of the International Financial Reporting Standards (“IFRS”) as endorsed by the Saudi Organization of Chartered Professional Accountants (“SOCPA”) in the Kingdom of Saudi Arabia. In 2019, CMA allowed listed companies to adopt the revaluation model for real estate and investment properties effective for annual reporting periods beginning on or after 1 January 2022 onwards while retaining the cost model for PPE and intangible assets for an additional period of five years. The recent amendment, effective from 1 January 2025, permits listed companies to apply the revaluation model to PPE, signaling a reassessment of the cost model’s applicability. However, the CMA has decided to maintain the cost model for intangible assets for the next two years, citing the practical challenges in determining their fair value reliably. Intangible assets—such as patents, trademarks, and goodwill—often lack active markets, making objective valuation difficult. CMA intends to re-assess the suitability of the revaluation model for intangible assets by the end of 2026.
2. REVALUATION MODEL FOR MEASURING PROPERTY, PLANT AND EQUIPMENT
1. Cost vs. Revaluation Model ( Find the table in the PDF)
2. Effects of the Revaluation Model Adoption
Adopting the revaluation model addresses limitations of historical cost accounting by ensuring asset values reflect current market conditions. Listed companies with specialized or high-value equipment stand to benefit, as well as those seeking to improve financial leverage ratios, manage asset replacement costs, or unlock value in fully depreciated assets.
Industrial companies in Saudi Arabia may find this model particularly useful, especially where assets have substantial replacement costs. Additionally, companies with low price-to-book ratios and high debt levels may leverage the model to strengthen their financial position and enhance investor confidence.
Industries where the adoption of revaluation models could prove beneficial include:
- Mining
- Energy – Entities operating fuel and drilling stations
- Utilities – Power and electricity
- Transportation and shipping
- Telecommunications
- Manufacturing, including food and beverages
- Consumer services – Operators of fitness facilities, car rentals and food chains
- Healthcare, Pharma and Biotechnology
3. Requirements for using the revaluation model
CMA has outlined specific criteria for adopting the revaluation model for measuring Property, Plant, and Equipment.
PPE must be evaluated by a minimum of two evaluators
The lowest value will be taken when preparing the annual financial statements and when using the revaluation model for the first time
The evaluators must be appointed by a decision of the company’s Board of Directors and after the recommendation of its Audit Committee
Appointed evaluators must hold fellowship membership from the Saudi Authority for Accredited Valuers
The Audit Committee in listed companies must monitor the valuation process and its results, reporting any observations to the Board of Directors
Interim and annual financial statements must include a disclosure of reconciliations concerning differences in assets, net assets, net income, and
comprehensive income between the revaluation model and the cost model
The results of the valuation process must be disclosed at least 30 days before the beginning of the first annual period in which the model is applied
This disclosure must include relevant items, policies, and any significant gains or losses arising from changes in revaluation
This approach requires rigorous adherence to valuation principles, regular updates, and explicit disclosures. While the revaluation model enhances
financial statement relevance by aligning asset values with market conditions, its adoption remains selective due to its implementation complexities,
the costs of frequent valuations, and potential volatility in reported equity.
4. Impact on the company’s financial statements
4.1 Treatment of revaluation gain or loss:
4.1 Treatment of revaluation gain or loss:
Company ABC, engaged in manufacturing automotive equipment, purchased an asset on 1 January 20X4 for SAR 1,000,000. The asset has a useful life of
10 years, implying a straight-line depreciation of SAR 100,000 per year. Currently effective requirements, it has applied the cost model but opted for the
revaluation model as permitted by the CMA, effective 1 January 20X5. The asset was revalued to SAR 1,200,000 on 1 January 20X5, resulting in a
revaluation gain. The asset was further revalued to SAR 900,000 on 1 January 20X6, leading to a revaluation loss. The asset was sold on 31 December 20X6
for SAR 850,000, leading to derecognition.
Find the journal entries in the PDF.
5. Challenges and Considerations
Valuation Costs: CMA has mandated that at least two independent evaluators assess the fair value of PPE, with each holding fellowship status from the
Saudi Authority for Accredited Valuers. Engaging these professionals will increase compliance costs.
Governance Oversight: The audit committee oversees the valuation process and reports key observations to the Board of Directors. Whilst
strengthened governance ensures the accuracy and credibility of revaluation assessments, challenges may arise in aligning valuations with CMA and
SOCPA requirements, particularly in ensuring consistency in valuation methodologies and addressing subjectivity in fair value assessments.
First-Time Adoption: Transitioning to the revaluation model can be complex and time-consuming. Companies must establish robust valuation,
depreciation, and financial reporting policies to ensure smooth adoption.
Enhanced Disclosure Requirements: Listed entities must provide reconciliations detailing differences in asset values, net assets, net income, and
comprehensive income when comparing the revaluation model to the cost model. These disclosures promote openness and enable stakeholders to
assess the financial impact of revaluation. For a detailed explanation, refer to the “Disclosure requirements – Revaluation of PPE” section.
6. Why the Cost Model for Intangibles?
CMA’s decision to maintain the cost model for intangible assets through 2026 stems from the inherent challenges in reliably determining their fair
value. Unlike tangible assets, intangibles—such as patents, trademarks, and goodwill—often lack active markets, making objective valuation difficult.
By the end of 2026, the CMA will reassess whether the cost model remains appropriate, ensuring regulatory oversight and comprehensive financial
disclosures for listed entities.
7. Disclosure requirements – Revaluation of PPE
Listed companies adopting the revaluation model must provide the following additional disclosures in their financial statements:
Statement of the fact that the revaluation model is being used as a measurement basis for certain asset classes
Inclusion of increases or decreases resulting from revaluations in the reconciliation of the carrying amount at the beginning and end of the period.
Disclosures as per Fair Value Measurement standard for PPE stated at revalued amounts and additionally, the below disclosures:
effective date of the revaluation whether an independent valuer was involved for each revalued class of property, plant, and equipment, the carrying amount that would have been recognized had the assets been carried under the cost model the revaluation surplus, indicating the change for the period and any restrictions on the distribution of the balance to shareholders.
Illustrative disclosures
Company ABC is engaged in the manufacturing business. The Company has chosen to measure the machinery held for its own use at fair value using
the revaluation model. The following are the illustrative disclosures required to be made in ABC’s financial statements:
Extract from Material Accounting Policy Information
Machinery held for own use is stated at fair value at the Balance Sheet date. Depreciation is recognized on a straight-line basis over the estimated useful
life. On disposal, the related revaluation reserve is transferred to retained earnings.
Extract from PPE note
Changes in Property, Plant, and Equipment
8. Transition to different models
Transition from cost model to revaluation model –Prospective effect
If an entity changes its accounting policy from the cost to the fair value model of accounting for property, plant, and equipment, then the effect of the
change is recognized as a revaluation. The opening equity balance is not adjusted, and comparatives are not restated.
Transition from revaluation model to cost model – Retrospective effect
When an entity changes its accounting policy from the fair value to the cost model of accounting for property, plant, and equipment, all previous
revaluations, including subsequent depreciation charges, are reversed. In this case, the usual procedures for a change in accounting policy apply – i.e. the
effect of the change is calculated retrospectively, and the adjustment is generally recognized by adjusting the opening balance of retained earnings for
the earliest prior period presented and restating comparative amounts presented.
9. Making the Right Choice
The decision to adopt the revaluation model requires careful consideration of the costs and benefits, and consequently, management should:
Assess the impact: Conduct a comprehensive analysis of the financial statement implications, ensuring that the decision reflects the underlying
economic reality.
Engage experts: Consult qualified valuation professionals and accounting experts in line with the criteria outlined by the CMA for qualified valuers as
previously discussed.
Develop policies: Establish clear policies and procedures for implementing and monitoring the revaluation model, ensuring that the acquire-to-retire
policy is updated to define aspects such as frequency, timing, and treatment for respective asset classes.
Communicate transparently: Clearly disclose the impact of the revaluation model to stakeholders, aligning with relevant accounting standard
disclosure requirements.
Adopting the revaluation model presents both opportunities and complexities. Accurately assessing asset values while managing fluctuating market
conditions, system updates, and evolving compliance requirements can strain internal resources. Challenges such as integrating fair value assessments
into existing ERP systems, reconciling financial statement impacts, and ensuring alignment across global reporting frameworks require a structured
approach. With our deep expertise in SOCPA and international accounting standards, we offer end-to-end support streamlining valuation processes,
enhancing system capabilities and strengthening governance controls. Our tailored approach ensures seamless execution, minimizing disruption while
unlocking the benefits of precise financial insights. Partner with us to navigate this transition effectively, confidently achieving compliance and
operational efficiency.
