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 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.

• 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.

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.

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.  

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;

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.

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.

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)

The formula for [calculating depreciation expense under the revaluation method is given below:

Depreciation can be charged basis on Straight Line/ Written down Method.

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 #4 - (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.

Here are some advantages of the concept.

• 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 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 increases the value of assets; hence the amount of depreciation will increase, resulting in income tax deductions.
• Overall, it helps in the accurate assessment of the asset value for the current period, which will help in valuation of the business as a whole, especially if there may have been any changes in the valuation due to business expansion or fluctuations in the market. Both outside stakeholders and internal management use the valuation of assets to decide the future potential of the business. This facilitates decision making related to investments and growth prospects. This also acts as a guide to decide for funding source since borrowing involves keeping assets as collateral to the lender for a long time period.
• It facilitates financial analysis and reporting since good value of assets improve the various financial ratios where asset values are used, and this in turn improves the credibility and image of the business in the market and among competitors.
• As per accounting standards and legal rules and regulations, it may be necessary to revalue the assets from time to time in order to arrive at the actual value of the business, especially for those companies who have considerable borrowings in the market.  

Here are some disadvantages of the concept.

• 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.
• This concept of revaluation of the assets can be quite subjective due to the fact that some part of it is also based on judgement of analysts and following of trends of past data. This may lead to under or over valuation of the assets which may have a negative impact on the business.
• The process is complex and not only requires funds but also considerable amount of time, data collection along with skill and experience of analysts who perform the valuation. Such additional cost and resources makes, the process complex.
• The tax liabilities can be affected due to such revaluation. If after valuing the asset, the prices are more, then the profits increase leading to increase in tax liability and also vice versa.
• Market fluctuation often affect revaluation and can cause frequent changes in value. This requires frequent adjustment in the books of accounts, adding to the complexity.

Suppose a company does the revaluation and results downward in the carrying amount 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.

• Upward revaluation amount of fixed assets to be credited into revaluation reserve, which can't be used for dividend distribution. Revaluation Reserve is a capital reserve, 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.

An entity should revaluate 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 is Assets Revaluation. We explain it with journal entry, examples, methods, why it is necessary, advantages & disadvantages. You can learn more about accounting from the following articles –

• Profit and Loss Accounting Definition
• Wasting Asset
• Fixed Assets Accounting
• Book Value of Asset Calculation