A business usually owns capital assets like Plant and machinery, land and building, equipment etc. The values of these assets are periodically depreciated over their useful life span both for accounting and tax purposes. The revaluation of assets is stark opposite to planned depreciation where the recorded decline in value of these assets tied down to their ages. The revaluation of assets is the action taken by the business to show the true market value of the assets which have considerably appreciated since their purchase such as land and buildings.
The increase in the value of fixed assets due to revaluation is credited to ‘Revaluation Reserve’. The corpus in ‘Revaluation Reserve’, is not available for distribution as dividend. This is because the revaluation of asset is only symbolizes professional’s perception of value of the asset and not the realized gains.
The ‘Revaluation Reserve’ is treated as a Capital Reserve as it cannot be distributed as dividends. However, if the asset has been sold at a profit, such profit is credited to Profit and Loss Account and the revaluation reserve balance is transferred to General Reserve Account. If the asset has been sold at loss, the loss is charged to revaluation reserve and the shortfall if any to be debited to Profit and loss account.
Important points to be remembered in case of revaluation of assets:
1. 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.
2. A revaluation surplus is an equity account in which is stored any upward changes in the value of capital assets.
3. Revaluation should be done for an entire class of fixed assets such as entire class of Plant and Machinery or Buildings etc.
4. The SEBI guidelines for disclosure and investor protection do not allow issue of bonus shares out of revaluation reserve. This prohibition is applicable to listed companies. The department of company affairs vide its Circular No. 9/94 has also prohibited issue of bonus shares out of revaluation reserve by existing private / closely held and unlisted companies.
5. On a review of the existing capital adequacy guidelines, the Reserve Bank of India made some amendments to the treatment of certain balance sheet items for the purposes of determining banks’ regulatory capital. Accordingly Revaluation reserves arising from change in the carrying amount of a bank’s property consequent upon its revaluation would be considered as common equity tier 1 capital (CET1) instead of Tier 2 capital as hitherto. These would continue to be reckoned at a discount of 55 per cent. The above treatment is subject to a condition that the revaluation of property should be realistic in accordance with Indian Accounting Standard.