Assets Revaluation

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.

Assets Revaluation Methods

Assets Revaluation

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For eg:
Source: Assets Revaluation (wallstreetmojo.com)

#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.read more (as per Balance Sheet) as on March 31, 2018, is $170,000.

The following is a journal entry of upward assets revaluation.

Assets revaluation example 1
Note: The increase in the value of fixed assets is not recorded in the Statement of Profit and Loss.

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.

Assets revaluation example 2

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.read more under the revaluation method is given below:

Depreciation Expense = Value of Asset at the Start of the Year + Additions during the Year – Deductions during the Year – Value of Asset at the End of the Year

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.read more.

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.

Advantages

Disadvantages

  • 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.

Limitations

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.read more 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

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.

Recommended Articles

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 –

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