Posted in Finance, Accounting and Economics Terms, Total Reads: 1850
Definition: Revaluation Reserve
Every asset in the balance sheet of an organisation is valued at a certain amount. If the value of the asset increases over the current amount accounted for in the balance sheet (that is, if the current market value of the asset exceeds the amount accounted for in the balance sheet), we go for its revaluation. This will lead to an increase in the value of the shareholder’s funds.
If the revaluation results in a gain to the company, we call it surplus. Similarly, if it incurs a reduction, we call it a deficit. One point to be noted is that it is neither a profit nor a loss to the company as they are not taken from the Profit & Loss statement.
If any surplus exists, it is first used to reverse (cancel) off the existing deficit and any excess if remaining, is added to the reserve. Same is the case in case of deficit and is used to cancel off the existing surplus.
Some of the situations when this is useful: when the company wants to sell the assets, to get fair market value of assets in times of lease transactions, in calculating return on capital employed.
Revaluation reserve is a non-cash reserve. It means there is no inflow or outflow of funds (cash) to the company. The amount in the revaluation reserve needs to be transferred over to the Retained Earnings Account throughout the remaining useful life of the asset considered.
For example, if your asset has say, 50 years remaining, and after revaluation you get a surplus of Rs.300000, you will need to credit 300000/50 = Rs.6000 each year into the retained earnings account and debit the same from the reserve.