What is Assets Revaluation?

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 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.read more 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 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.read more named “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. read more.

Assets Revaluation Methods

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#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 assetsType Of AssetsAssets are the resources owned by individuals, companies, or governments expected to generate future cash flows over a long period. There are broadly three types of asset distribution: 1. Based on convertibility (current and non-current assets), 2. Physical existence (tangible and intangible assets), 3. Usage (operating and non-operating assets)read more 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.

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.

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 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 of $20,000. Fixed Assets were 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 were 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

  • If assets are revalued on the upward side, this will increase the Entity’s cash profit (Net Profit plus Depreciation).To negotiate a fair price for the entity’s assets 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. read more 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.read more (Secured LoanSecured LoanSecured loans refer to the type of loans approved and received against a guarantee or collateral. If they fail to do so, the lending institution acquires the collateral to compensate for the amount that the borrowers were allowed.read more 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.read more It increases the value of assets; hence the amount of depreciation will increase, resulting in income tax deductions.

Disadvantages

  • The company could not revalue its fixed assets every year, or the fixed asset cost 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 on the revaluation of fixed assets as this work takes assistance from technical experts, and an increase in expenses results in less profit.

Limitations

Suppose a company does the revaluation and results downward in theThe 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 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. In that case, the low value is to be debited in the Profit or Loss Account. However, If the credit balance is available in the revaluation reserve for that fixed asset, 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, which can’t be used for dividend distribution. Revaluation Reserve is aCapital 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.read more 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.read more, and it can be used to purchase fixed asset revaluation; it can be set off against Impairment loss of fixed assets.If any increase in depreciation is created due to the revaluation of Assets, depreciation is 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.

Conclusion

An entity should reevaluate 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 depreciation 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 the following articles –

  • Profit and Loss Accounting DefinitionWasting AssetFixed Assets AccountingBook Value of Asset Calculation