Assets Revaluation is an adjustment made in the carrying value of the fixed asset by adjusting it upward or downward depending upon the fair market value of the fixed asset i.e. the revaluation can reflect both the appreciation as well as depreciation in the value of fixed asset and the purpose for which asset revaluation is done includes sale of the asset to another business unit, merger or acquisition of the company, etc.
What is Assets Revaluation?
Revaluation of Assets means a change in the market value of assets, whether it is increasing or decreasing. Generally, evaluations are carried out for an asset whenever there is a difference between the current market value of the asset and its value on the company’s balance sheet.
- As per US GAAP, All fixed assets are to be recognized basis historical cost approach. In addition, Fixed AssetsFixed AssetsFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples. should be revalued on the basis cost or fair market value, whichever is lower.
- As per IFRS, fixed assets should be recorded at cost. Thereafter, companies are allowed to use either the Cost Model or the Revaluation model.
- In the cost model, the carrying value of the assets is not adjusted and is depreciated over the useful life.
- In the revaluation model, the cost of the asset can be adjusted upwards or downwards, depending on the fair value. In this case, asset Revaluation creates reserveRevaluation Creates ReserveA revaluation reserve is a non-cash reserve created to reflect the asset's true value when the market value of a certain asset category is more or less than the asset's value at which it is recorded in the books of account. named it “Revaluation Reserve.” When asset value increased credited into the revaluation reserve and when it decreased debited. We revalue the Fixed Assets and Intangible AssetsIntangible AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can't touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. .
Assets Revaluation Methods
#1 – Indexation Method
In this method, the index does apply to the cost of assets to know the current cost. Index list issued by the statistical department.
#2 – Current Market Price Method
As per the prevailing market price of assets.
- Revaluation of the Land & Building – For getting the fair market value of the building, we can take the help of real estate values/ property dealers available in the market.
- Plant and Machinery – Forgetting the fair market value of plant and machinery, we can take the help of the supplier.
This method is generally used by the management of the board for the revaluation of assets.
#3 – Appraisal Method
In this method, the technical valuer does a detailed assessment of the assets to find out the market value. A complete assessment is required when the Co. is taking out an insurance policy for fixed assets. In this method, we should ensure that the fixed assets not over/undervalued.
There are some points to be factored in determining the fair market value of an asset which as follows:
- Date of purchase of fixed assets for calculating the age of fixed assets.
- Usage of Assets such as 8 hours, 16 hours, and 24 hours (Generally 1 Shift = 8 Hours).
- Type of assets such as Land & Building, Plant & Machinery.
- Repairs & Maintenance policy of the enterprise for fixed assets;
- Availability of Spare Parts in the future;
Asset Revaluation Journal Entries Examples
Example #1 – (Journal Entry of Upward Revaluation Reserve)
Axe Ltd. revalues the building and finds out that the Market value should be $200,000. Carrying ValueCarrying ValueCarrying value is the book value of assets in a company's balance sheet, computed as the original cost less accumulated depreciation/impairments. It is calculated for intangible assets as the actual cost less amortization expense/impairments. (as per Balance Sheet) as on March 31, 2018, is $170,000.
The following is a journal entry of upward assets revaluation.
Example $2 – (Journal Entry of Downward Revaluation Reserve)
Axe Ltd. revalues the building and finds out that the Market value should be $150,000. Carrying amount (as per Balance Sheet) as on March 31, 2018, is $190,000.
The following is a journal entry of downward asset revaluation.
When prices are declined of fixed assets, and it doesn’t have a credit balance equal to the declined in the prices, then Impairment Loss to be debited in the Statement of Profit & Loss for the difference amount of revaluation reserve minus declined in the market price of fixed assets.
Depreciation Calculation under Asset Revaluation Method
The formula for calculating depreciation expenseCalculating Depreciation ExpenseThe Depreciation Expense Formula computes how much of the asset's value can be deducted as an expense on the income statement. Formula for Straight-line depreciation method= Cost of an asset - Residual value/useful life of an asset. under the revaluation method is given below:
Depreciation can be charged basis on Straight Line/ Written down MethodWritten Down MethodThe Written Down Value method is a depreciation technique that applies a constant rate of depreciation to the net book value of assets each year, resulting in more depreciation expenses recognized in the early years of the asset's life and less depreciation recognized in the later years of the asset's life..
Example #1 – (If Company purchased fixed assets during the Financial Year)
M/s XYZ and Co. have Assets Costing $50,000 on April 1, 2018. During the Financial Year 2018-19, Co. purchased Fixed Assets $20,000. Fixed Assets revalued at $62000 on March 31, 2019.
Depreciation Charge = $(70000 – 62000) = $8,000
Solution – Total Assets before revaluation and depreciation was Rs. $50000+$20000= $70000. Revalued Amount after depreciation was $62000.
Example #2 – (If Company sold fixed assets during the Financial Year)
M/s XYZ and Co. have Assets Costing $50,000 on April 1, 2018. During the Financial Year 2018-19, Co. sold Fixed Assets costing $20,000. Fixed Assets revalued at $25000 on March 31, 2019.
Depreciation Charge = $(30000–25000) = $5,000
Solution – Total Asset before revaluation and depreciation was Rs. $50000-$20000= $30000.
Revalued Amount after depreciation was $25000.
- If assets revalued on the upward side, this will increase the cash profit (Net Profit plus Depreciation) of the Entity.
- To negotiate a fair price for the assets of the entity before the merger with or takeover by another company.
- The credit balanceThe Credit BalanceCredit Balance is the capital amount that a company owes to its customers & it is reflected on the right side of the General Ledger Account. Usually, Liability accounts, Revenue accounts, Equity Accounts, Contra-Expense & Contra-Asset accounts tend to have the credit balance. of revaluation reserve can be used for the replacement of fixed assets at the end of their useful lives.
- To decrease the leverage ratioLeverage RatioDebt-to-equity, debt-to-capital, debt-to-assets, and debt-to-EBITDA are examples of leverage ratios that are used to determine how much debt a company has taken out against its assets or equity. (Secured LoanSecured LoanA secured loan is one where the borrower pledges his/her assets as a collateral to the issuer as a security. In the event of nonpayment of the loan, the issuer has the right to sell or transfer the secured property in order to recover the balance owed. to Capital).
- Tax Benefit: –Tax Benefit: -Tax benefits refer to the credit that a business receives on its tax liability for complying with a norm proposed by the government. The advantage is either credited back to the company after paying its regular taxation amount or deducted when paying the tax liability in the first place. It results in an increase in the value of assets; hence the amount of depreciation will increase and thereby resulting in income tax deductions.
- The company could not revalue its fixed assets every year, or the cost of the fixed asset may not decline. In such a situation, depreciation could not be charged by the company.
- The total depreciation charged on fixed assets revaluation does not show a regular pattern.
- The company does spend much amount on revaluation of fixed assets as this work takes assistance from technical experts, and an increase in expenses results in less profit.
If a company does the revaluation and it results downward in the carrying amountCarrying AmountThe carrying amount or book value of asset is the cost of tangible, intangible assets or liability recorded in the financial statements, net of accumulated depreciation or any impairments or repayments. Accordingly, the carrying amount may differ from the market value of assets. of fixed assets revaluation, then the downward value to be debited in the Profit or Loss Account. However, If credit balance available in the revaluation reserve for that fixed asset, then we will debit the revaluation reserve instead of the Profit or Loss Account.
Important Points to Note
- Upward revaluation amount of fixed assets to be credited into revaluation reserve, and this reserve can’t use for dividend distribution. Revaluation Reserve is a capital reserveCapital ReserveCapital reserve is a reserve that is formed from the company's profits earned from its non-operating activities during a period of time and is retained for the purpose of financing the company's long-term projects or writing off its capital expenses in the future., and it can be used for the purchase of fixed asset revaluation; it can be set-off against Impairment loss of fixed assets.
- If any increase in depreciation created due to the revaluation of Assets, depreciation to be debited in the revaluation reserve account;
- Consideration of the suitable method of asset revaluation is most important. The appraisal method is the most used method.
An entity should do a revaluation of its assets because revaluation provides the present value of assets owned by an entity, and upward revaluation is beneficial for the entity; it can charge more deprecation on upward value and get the tax benefit.
This has been a guide to what Assets Revaluation is and its definition. Here we discuss methods of Asset Revaluation along with examples of journal entries, advantages, and disadvantages. You can learn more about accounting from following articles –