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 Assets 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 reserve 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 Assets.
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 building we can take 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 Value (as per Balance Sheet) as on March 31, 2018, is $170,000.
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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 assets 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 expense under the revaluation method is given below:
Depreciation can be charged basis on Straight Line/ Written down Method.
Example #1 – (If Company purchased fixed assets during the Financial Year)
M/s XYZ and Co. has Assets Costing $50,000 on 1st April 2018. During the Financial Year 2018-19, Co. purchased Fixed Assets $20,000. Fixed Assets revalued at $62000 on 31st March 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. has Assets Costing $50,000 on 1st April 2018. During the Financial Year 2018-19, Co. sold Fixed Assets costing $20,000. Fixed Assets revalued at $25000 on 31st March 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.
Advantages
- 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 balance of revaluation reserve can be used for the replacement of fixed assets at the end of their useful lives.
- To decrease the leverage ratio (Secured Loan to Capital).
- Tax Benefit: – It results in an increase in the value of asset hence the amount of depreciation will increase and thereby resulting in income tax deductions.
Disadvantages
- The company could not revalue its fixed assets in 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.
Limitations
If a company does the revaluation and it results downward in the carrying amount 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 reserve 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.
Conclusion
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.
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