REVALUATION SURPLUS ALL YOU WANT TO KNOW ABOUT

REVALUATION SURPLUS ALL YOU WANT TO KNOW ABOUT

Saturday Brain Storming Thought (101)-20/02/2021

COMPILED BY ER AVINASH KULKARNI

REVALUATION SURPLUS

A revaluation surplus is an equity account in which is stored any upward changes in the value of capital assets

If a revalued asset is subsequently dispositioned out of a business, any remaining revaluation surplus is credited to the retained earnings account of the entity

This surplus is only used when an organization creates it’s financial statements in conformance with international financial reporting standards

No revaluation surplus is allowed for a firm that uses generally accepted accounting principles

Calculation of revaluation surplus

Under revaluation model, management can revalue it’s assets to their current market value

If there is an increase in value of asset, the difference between assets market value and current book value is recorded as revaluation surplus

Revaluation Gain

The revaluation gain is known as unrealised gain, which later becomes realised when the asset is disposed of (derecognised)

Revaluation Reserve

Revaluation reserve is the upward and downward adjustment of the value of an asset, done depending on the material changes in the value of the asset

Revaluation Deficit

When a revaluation indicates that the fair value of an intangible asset is less than its carrying amount, the amount of deficit is generally recognised in profit or loss

Converting revaluation surplus to retained earnings

If a fixed asset is derecognised, transfer any associated revaluation surplus to retained earnings

The amount of this surplus transferred to retained earnings is the difference between the depreciation based on the original cost of the asset and the depreciation based on the revalued carrying amount of the asset

Retained Earnings

Retained Earnings (RE) is the amount of net income left over for the business after it has paid out dividends to its shareholders

The money not paid to shareholders counts as retained earnings

Necessities of Revaluation

1) to show the true rate of return on capital employed

2) to conserve adequate funds in the business for replacement of fixed assets at the end of their useful lives

3) provision for depreciation based on historic cost will show inflated profits and lead to payment of excessive dividends

4) to show the fair market value of assets which have considerably appreciated since their purchase such as land and buildings

5) to negotiate fair price for the assets of the companies before merger with or acquisition by another company

6) to enable proper internal reconstruction, and external reconstruction

7) to issue shares to existing shareholders

8) to get fair market value of assets, in case of sale or leaseback transaction

9) when the company intends to take a loan from banks/financial institutions by mortgaging it’s fixed assets

10) proper revaluation of assets would enable the company to get a higher amount of loan

11) sale of an individual asset or group of assets

12) in financial firms revaluation reserve are required for regulatory reasons

13) to decrease the leverage ratio

Leverage Ratio

A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt (loans) or assesses the ability of a company to meet it’s financial obligations

leverage ration is the ratio of debt to equity

Banks have regulatory oversight on the level of leverage they are can hold

methods of revaluation of fixed assets

1) indexation

2) current market price (CMP)

3) Appraisal method

4) selective revaluation

Preliminary considerations for revaluation

1) revaluation necessities

2) most suitable method of revaluation

3) what assets are to be revalued

4) what is the period within which the revaluation has to be completed

5) what guidelines should be laid down for the revaluation

6) what modifications will be required

Upward Revaluation

1) increase in the value of fixed assets because of revaluation of fixed assets is credited to revaluation reserve

2) revaluation reserve is not available for distribution as dividend

3) revaluation reserve is treated as a capital reserve

4) the increase in depreciation arising out of revaluation of fixed assets is debited to revaluation reserve and the normal depreciation to profit and loss account

5) appraisal method is commonly used method for calculating revaluation surplus

6) when an asset is sold that has previously been revalued, the revaluation within the carrying value is debited to revaluation reserve

7) in case of depreciable assets such as vehicles, furniture & fittings or office equipments, revaluation is not carried out

8) revaluation should not result in the net book value of an asset exceeding it’s recoverable value

Downward Revaluation

Revaluation can also mean a downward revision in the book values of the assets (impairment loss)

Any downward revision in the book values of the assets is immediately written off to the profit and loss account

An asset is considered to be impaired (and is thus written down) if it’s carrying amount is greater than its recoverable amount

In case of downward revaluation of an asset which is for the first time revalued, the account to be debited is profit and loss account

Depreciation expense

It is that portion of a fixed asset that has been considered consumed in the current period

The intent of this charge is to gradually reduce the carrying amount of fixed assets as their value is consumed over time

This is non-cash expense, that is, there is no associated cash outflow

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)

Fixed asset revaluation recording

1) A fixed is originally recorded at cost

2) but the carrying value of the fixed asset then can be increased or decreased depending on the fair market value of the fixed asset, normally once a year

3) If asset value increases – it is revaluation surplus

4) if asset value reduces, it is said to be written down

Compiled by:-

Avinash Kulkarni

Chartered Engineer
Govt Regd Valuer
IBBI Regd Valuer