Revaluation: A Comprehensive Guide
Revaluation is an accounting process that involves adjusting the value of an asset on a company’s balance sheet to its current market value. This is generally performed to reflect the true value of assets that may have significantly appreciated over time, ensuring accuracy in financial reporting and compliance with accounting standards.
Key Features
- Asset Valuation Adjustment: Revaluation increases the summarized book value of an asset to its current market value.
- Revaluation Reserve: A revaluation reserve is credited whenever an asset is revalued, representing the unrealized gain on the asset till the point of realization.
- Impact on Financial Statements: The increase in asset value is displayed on the balance sheet, and the corresponding revaluation reserve is part of equity.
Examples
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Revaluation of Property: A company buys a building for $500,000. Over time, due to market conditions, the building’s value appreciates to $800,000. The company performs a revaluation, increasing the building’s book value on the balance sheet to $800,000 and crediting a revaluation reserve with $300,000.
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Revaluation of Machinery: A piece of machinery was initially purchased for $200,000 and has been depreciated to $120,000. Due to technological advancements, its market value increases to $150,000. Revaluation adjusts its book value to $150,000 and credits the revaluation reserve with $30,000.
Frequently Asked Questions (FAQs)
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Q: When should revaluation be performed?
- A: Revaluation should be performed when there is a significant change in the market value of an asset indicating that its book value does not reflect current conditions.
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Q: Can revaluation lead to a decrease in the value of an asset?
- A: Yes, if the market value of an asset decreases, a downward revaluation (impairment) may occur, reducing the asset’s value and reflecting a devaluation loss.
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Q: How is revaluation different from depreciation?
- A: Depreciation systematically reduces an asset’s book value over its useful life due to wear and tear, whereas revaluation adjusts its value based on current market conditions, which can result in either an upward or downward adjustment.
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Q: How does revaluation impact financial performance?
- A: While revaluation itself does not impact profit or loss, the increase or decrease in asset value is reported in the revaluation reserve, part of shareholders’ equity. It affects financial ratios and the value portrayed on the balance sheet.
Related Terms
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Revaluation Reserve: An equity account that captures the increase in asset value after a revaluation process. It holds unrealized gains from revalued assets until they are sold or disposed of.
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Impairment: Reducing the book value of an asset to reflect its lower market value, often recognized through a loss in profit or loss statements.
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Depreciation: The systematic allocation of the cost of an asset over its useful life, reflecting wear and tear or obsolescence.
Online Resources
Suggested Books for Further Studies
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- “Financial Accounting and Reporting” by Barry Elliott and Jamie Elliott
- “Accounting Principles” by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso
- “Accounting Handbook” by Lita Epstein and Kenneth Boyd
Accounting Basics: “Revaluation” Fundamentals Quiz
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