Assets Revaluation

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21 Aug, 2024

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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 the fixed asset.

The purpose for which asset revaluation is done includes the sale of the asset to another business unit, merger or acquisition of the company, etc. It is a useful step to analyze whether the assets are able to generate the expected returns in the business, find their current market value, and undergo any reconstruction if required.

What Is Assets Revaluation?

Asset revaluation adjusts the value of a fixed asset to its current market value, either increasing or decreasing its carrying value. It can happen when an asset appreciates or depreciates in value or during a merger or sale.
The indexation, current market price, and appraisal methods are asset revaluation methods.
Revaluation gives an entity the present value of its assets, and upward Revaluation benefits the entity since it allows it to deduct more depreciation from the higher significance and get tax benefits.

Assets Revaluation Explained

Revaluation of Assets means a change in the market value of assets, increasing or decreasing. Generally, evaluations are carried out for an asset whenever there is a difference between the asset's current market value and its value on the company's balance sheet.

As per US GAAP, All fixed assets are to be recognized based on the historical cost approach. In addition, Fixed Assets should be revalued based on cost or fair market value, whichever is lower.
As per IFRS, fixed assets should be recorded at cost. After that, companies can 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.
We revalue the Fixed Assets and Intangible Assets. In the revaluation model, the asset's cost can be adjusted upwards or downwards, depending on the fair value. In this case, asset Revaluation creates reserve named "Revaluation Reserve." When asset value increased credited into the revaluation reserve, and when it decreased debited. We revalue the Fixed Assets and Intangible Assets.

Why Is It Necessary?

The necessity of fixed assets revaluation can be highlighted using the following points.

It makes the business ready for sale or any merger or takeover, in case such a process is being considered for future.
It helps in bargaining and taking a stance regarding the possible price that the purchasing firm may have to pay. In this way it becomes easy to make decisions with a limited time.
Fixed assets revaluation shows the current value of the assets of the business. If the valuation is high, then it increases the credibility of the firm in the market. Stakeholders look up to it as an investment option and the business has an edge over its competitors in the industry.
The management can continuously keep track of any underperforming on obsolete assets that may require sale or disposal with immediate effect. This is because any such asset, if continues to remain in the business, will incur cost that will bring down the profits and performance overall.

Thus, the above points prove that the process is necessary and crucial.

Methods

Given below the widely used methods of revaluation of assets in a company. Let us study the current and non current assets revaluation in details.

#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 - To get 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 - To get the fair market value of plant and machinery, we can take the supplier's help..

The board's management generally uses this method for the revaluation of assets.

#3 - Appraisal Method

In this method, the technical valuer assesses the assets to determine the market value. A complete assessment is required when the Co. takes out an insurance policy for fixed assets. This method should ensure that the fixed assets are not over/undervalued.

There are some points to be factored in determining the fair market value of an asset which are 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;

Journal Entries

For any kind of financial concept or transaction, it is important to learn the journal entries that are passed in the books of accounts so as to record them in details for future reference. The entries current and non current assets revaluation are as given below:

In case of upward revaluation reserve, the journal entry in the books will be as follows:

Asset Account Dr

To Revaluation Reserve Account.

However, in case of a downward revaluation reserve, the asset revaluation accounting will be as follows:

Revaluation Reserve A/c Dr

To Asset A/c

The above are the method to record the transaction in the books of accounts. However, they have been elaborately explained in the examples given below. Let us go through them in details.

Examples

Let us understand the concept of asset revaluation accounting with the help of some suitable 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.

The following is a journal entry of upward assets revaluation.

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. The carrying amount (as per the Balance Sheet) on March 31, 2018, is $190,000.

The following is a journal entry on downward asset revaluation.

When prices are declined of fixed assets and it doesn't have a credit balance equal to the prices, then Impairment Loss to be debited in the Statement of Profit & Loss for the difference amount of revaluation reserve minus the decline in the market price of fixed assets.

Example #4 - (If Company purchased fixed assets during the Financial Year)

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Are asset revaluations taxable?

Revaluation gives an entity the present value of its assets, and upward Revaluation benefits the entity by allowing it to deduct more depreciation from the higher significance and get tax benefits.

Is asset revaluation reserve equity?

If a revaluation gain is identified on an asset that previously had a revaluation loss recognized in the income statement, the revenue will also be recognized in the income statement. However, if it does not reverse a previous loss, the gain will be recognized in equity.

How often should asset revaluation be performed?

The frequency of asset revaluation depends on the company's accounting policies and regulatory requirements. Some assets may be revalued annually, while others may be revalued less frequently, such as every few years. The decision on the frequency of Revaluation should consider the nature of the assets, market conditions, and accounting standards.

Can an asset revaluation reserve be negative?

It is a negative revaluation when an asset's book value declines due to impairment. Any loss in such circumstances ought to be deducted from the revaluation excess. If there is no surplus or the loss exceeds it, the leftover amount must be reported as an impairment loss.