Revaluation

Revaluation is used to adjust the book value of a fixed asset to its current market value. This is an option under International Financial Reporting Standards, but is not allowed under Generally Accepted Accounting Principles. Once a business revalues a fixed asset, it carries the fixed asset at its fair value, less any subsequent accumulated depreciation and accumulated impairment losses. An organization cannot selectively apply revaluation to individual fixed assets. Instead, it is applied to entire asset classes.

Revaluation can only be used it if it is possible to reliably measure the fair value of an asset. A firm must also make revaluations with sufficient regularity to ensure that the amount at which an asset is carried in the company’s records does not vary materially from its fair value.

If the election is made to use revaluation and a revaluation results in an increase in the carrying amount of a fixed asset, recognize the increase in other comprehensive income, as well as accumulate it in equity in an account entitled “revaluation surplus.” However, if the increase reverses a revaluation decrease for the same asset that had been previously recognized in profit or loss, recognize the revaluation gain in profit or loss to the extent of the previous loss (thereby erasing the loss).

If a revaluation results in a decrease in the carrying amount of a fixed asset, recognize the decrease in profit or loss. However, if there is a credit balance in the revaluation surplus for that asset, recognize the decrease in other comprehensive income to offset the credit balance. The decrease that is recognized in other comprehensive income decreases the amount of any revaluation surplus that the business may have already recorded in equity.

Related Courses

Fixed Asset Accounting