In finance, a revaluation of fixed assets is an action that may be required to accurately describe the true value of the capital goods a business owns. This should be distinguished from planned depreciation, where the recorded decline in value of an asset is tied to its age.
What is Assets Revaluation?
Revaluation of Assets means a change in the market value of assets, whether it is increasing or decreasing. Generally, evaluations are carried out for an asset whenever there is a difference between the current market value of the asset and its value on the company’s balance sheet.
- As per US GAAP, All fixed assets are to be recognized basis historical cost approach. In addition, Fixed Assets should be revalued on the basis cost or fair market value, whichever is lower.
- As per IFRS, fixed assets should be recorded at cost. Thereafter, companies are allowed to use either the Cost Model or the Revaluation model.
- In the cost model, the carrying value of the assets is not adjusted and is depreciated over the useful life.
- In the revaluation model, the cost of the asset can be adjusted upwards or downwards, depending on the fair value. In this case, asset Revaluation creates reserve named it “Revaluation Reserve.” When asset value increased credited into the revaluation reserve and when it decreased debited. We revalue the Fixed Assets and Intangible Assets.
How Frequently Should Assets Be Revalued?
The fair values of some fixed assets may be quite volatile, necessitating revaluations as frequently as once a year. In most other cases, IFRS considers evaluations once every three to five years to be acceptable.
How to Revalue an Asset
Use a market-based appraisal by a qualified valuation specialist to determine the fair value of a fixed asset. If an asset is of such a specialized nature that a market-based fair value cannot be obtained, then use an alternative method to arrive at an estimated fair value. Examples of such methods are using discounted future cash flows or an estimate of the replacement cost of an asset.
Assets Revaluation Methods
In this method, the index does apply to the cost of assets to know the current cost. Index list issued by the statistical department.
Current Market Price Method
As per the prevailing market price of assets.
- Revaluation of the Land & Building – Forgetting the fair market value of the building, we can take the help of real estate values/ property dealers available in the market.
- Plant and Machinery – Forgetting the fair market value of plant and machinery, we can take the help of the supplier.
- This method is generally used by the management of the board for the revaluation of assets.
In this method, the technical valuer does a detailed assessment of the assets to find out the market value. A complete assessment is required when the Co. is taking out an insurance policy for fixed assets. In this method, we should ensure that the fixed assets are not over/undervalued.
There are some points to be factored in determining the fair market value of an asset which are as follows:
- Date of purchase of fixed assets for calculating the age of fixed assets.
- Usage of Assets such as 8 hours, 16 hours, and 24 hours (Generally 1 Shift = 8 Hours).
- Type of assets
- such as Land & Building, Plant & Machinery.
- Repairs & Maintenance policy of the enterprise for fixed assets;
- Availability of Spare Parts in the future;
Reasons for revaluation
It is common to see companies revaluing their fixed assets. It is important to make a distinction between a ‘private’ revaluation and a ‘public’ revaluation which is carried out in the financial reports. The purposes are varied:
- To show the true rate of return on capital employed.
- To conserve adequate funds in the business for replacement of fixed assets at the end of their useful lives. Provision for depreciation based on historical cost will show inflated profits and lead to payment of excessive dividends.
- To show the fair market value of assets which have considerably appreciated since their purchase such as land and buildings.
- To negotiate fair price for the assets of the company before merger with or acquisition by another company.
- To enable proper internal reconstruction and external reconstruction.
- To issue shares to existing shareholders (rights issue or follow-on offering).
- To get fair market value of assets, in case of sale-and-leaseback transaction.
- Sale of an individual asset or group of assets.
- To decrease the debt-to-equity ratio (“leverage ratio”).