Revaluation of Fixed Assets

What is Revaluation of Fixed Assets?

Revaluation of Fixed Assets is an accounting process that involves reassessing the carrying amount of a company’s fixed assets to reflect their current fair value, either because the values have appreciated over time or inflation has made the original balance-sheet values unrealistic. This practice ensures that the company’s financial statements present an accurate picture of asset values and financial positions.

Key Points:

Obligatory Disclosure: According to the Companies Act, directors must disclose in the directors’ report if they believe the value of land significantly differs from the stated balance-sheet value.
Procedural Guidelines: The Companies Act specifies procedures for revaluing fixed assets, aligning with the alternative accounting rules.
Revaluation Model: Under the Financial Reporting Standard Applicable in the UK and Republic of Ireland (Section 17), companies can opt for regular revaluation rather than historical cost, but must apply this consistently across all assets of the same class.
Financial Statements Impact: The difference between the pre- and post-revaluation values is shown in the statement of comprehensive income under “other comprehensive income”.
Relevant Standards: IAS 16, Property, Plant, and Equipment, provides the standards for revaluation. A different treatment is applied to investment properties.

Examples

Example 1: A company purchased a piece of machinery for $100,000 five years ago. Due to technological advancements, the machinery’s current market value is now $120,000. Revaluation of this asset would update its balance-sheet value to reflect this increased market value.
Example 2: A real estate company owns land valued at $500,000 on the balance sheet. Due to an infrastructure project nearby, the land is now worth $800,000. Revaluing the land on the balance sheet will present a more accurate asset value.

Frequently Asked Questions

1. Why is revaluation necessary? Revaluation ensures that the asset values on a company’s balance sheet accurately reflect their current market value, thereby providing a truer picture of financial health.

2. How often should revaluation be done? Revaluations should be performed with sufficient regularity to ensure the carrying amount does not significantly differ from the fair value.

3. What is the impact of revaluation on financial statements? The revaluation surplus, which is the difference between the book value and the revalued amount, is transferred to a revaluation reserve. It affects the statement of comprehensive income under “other comprehensive income”.

4. Can revaluation be applied to all assets? Revaluation can be applied to assets only if their fair value can be reliably measured. It must be applied consistently to all assets within the same class.

5. What happens in case of a decrease in value post-revaluation? A decrease in value post-revaluation is treated as an expense and recognized in the income statement unless it reverses a previous surplus credited to the revaluation reserve for that asset.

Historical Cost: The original monetary value of an asset, recorded when it was first acquired.
Other Comprehensive Income: A section of equity that includes income and expenses not recognized in the income statement.
International Accounting Standard (IAS) 16: The standard governing the accounting treatment for property, plant, and equipment.
Investment Properties: Properties held to earn rentals or for capital appreciation, or both, treated differently in accounting standards.
Alternative Accounting Rules: Guidelines provided for methods other than historical cost accounting, in certain contexts.

Online References

Suggested Books for Further Studies

“International Accounting Standards: From Understanding to Implementation” by Roger Hussey
“Financial Accounting and Reporting” by Barry Elliott and Jamie Elliott
“Accounting for Fixed Assets” by Raymond H. Peterson
“Financial Reporting in the UK: A Practical Guide” by Jo Gollfer and Ana Romero
“Advanced Financial Accounting” by Richard Lewis, David Pendrill

Accounting Basics: “Revaluation of Fixed Assets” Fundamentals Quiz

### What is revaluation of fixed assets aimed at reflecting? - [ ] Depreciation expense - [x] Current fair market value - [ ] Historical cost - [ ] Insurance value > **Explanation:** The revaluation of fixed assets is aimed at reflecting their current fair market value, providing a more accurate financial position of the company. ### Under which standard is the revaluation of fixed assets specified? - [x] IAS 16 - [ ] FRS 102 - [ ] GAAP - [ ] SOX > **Explanation:** IAS 16, Property, Plant, and Equipment, is the relevant International Accounting Standard that specifies the guidelines for revaluation of fixed assets. ### How often should revaluation of fixed assets be carried out? - [ ] Annually - [ ] Biannually - [x] With sufficient regularity - [ ] Every ten years > **Explanation:** Revaluation should be carried out with sufficient regularity to ensure that the carrying amount of the assets does not significantly differ from their fair value. ### In which document must directors disclose significant differences in asset values? - [ ] The balance sheet - [ ] The income statement - [x] The directors' report - [ ] The cash flow statement > **Explanation:** The Companies Act requires directors to disclose in the directors' report if they believe the value of land differs materially from the balance-sheet value. ### If a revaluation results in an increase in asset value, how is this reported? - [ ] As retained earnings - [ ] As deferred revenue - [x] In the revaluation reserve - [ ] As additional capital stock > **Explanation:** When a revaluation results in an increase in the asset value, the difference is credited to the revaluation reserve, part of equity. ### Should revaluation apply to all assets in the same class consistently? - [x] Yes - [ ] No - [ ] Only on selected assets - [ ] Depending on management's discretion > **Explanation:** Revaluation must be applied consistently to all assets within the same class if the company chooses to revalue its fixed assets. ### What is the impact of a decrease in asset value due to revaluation? - [ ] It is added to retained earnings - [x] It is recognized as an expense in the income statement - [ ] It is deferred - [ ] It is ignored > **Explanation:** A decrease in asset value due to revaluation is treated as an expense and is recognized in the income statement unless it reverses a previous revaluation surplus. ### Can revaluation increase both current and non-current asset values? - [x] Yes - [ ] No - [ ] Only current assets - [ ] Only non-current assets > **Explanation:** Revaluation can affect both current and non-current assets, but it is commonly applied to long-term fixed assets. ### What accounting practice does revaluation of fixed assets oppose? - [x] Historical cost accounting - [ ] Current cost accounting - [ ] Fair value accounting - [ ] Accrual accounting > **Explanation:** Revaluation of fixed assets opposes historical cost accounting, as it adjusts asset values to reflect fair market conditions rather than the original acquisition cost. ### What is created to account for the increase in asset value post-revaluation? - [ ] An income surplus - [x] A revaluation reserve - [ ] A revaluation deficit - [ ] A capital reserve > **Explanation:** The increase in asset value post-revaluation is credited to a revaluation reserve, an equity account in the financial statements.

Thank you for diving deep into the nuanced topic of fixed asset revaluation and completing these targeted quiz questions. Enhancing your understanding in these areas is vital for accurate financial reporting.