Revaluation of Asset, Meaning, Steps and Examples

Revaluation of assets is a crucial accounting practice that ensures a company's financial statements accurately reflect the current market value of its assets. This process involves reassessing the carrying amount of fixed assets, which may have fluctuated due to market conditions, technological advancements, or other factors. Understanding asset revaluation's meaning, methods, and functions is essential for maintaining transparency and compliance with accounting standards. This article explores the concept of asset revaluation, discusses various methods used in the process, outlines its key functions, and provides a solved example to illustrate the calculation. By delving into these aspects, businesses can better manage their asset values and make informed financial decisions.

What is the Revaluation of Asset?

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Steps to Calculate of Revaluation of Asset

• Original Cost of the Asset : The initial purchase price of the asset.
• Accumulated Depreciation : The total depreciation charged on the asset up to the revaluation date.
• Current Book Value : Calculate this by subtracting the accumulated depreciation from the original cost.

• Obtain the asset's current market value through appraisal, market research, or professional valuation.

• Revaluation Surplus : If the fair market value exceeds the current book value.
• Revaluation Deficit : If the fair market value is lower than the current book value.

• Update the asset's book value on the balance sheet to reflect the new fair market value.

• Revaluation Surplus : Credited to the Revaluation Reserve account under equity.
• Revaluation Deficit : Debited to the Revaluation Reserve account or directly to the income statement if no previous revaluation surplus exists.

Methods Of Calculation of Revaluation of Asset

1. Indexation Method The indexation method applies an index to the cost of assets to determine their actual cost. The statistical department typically issues the index list used in this method.
2. Current Market Price Method This method bases asset revaluation on the current market price. Property dealers and real estate professionals are consulted for buildings and land, while suppliers are preferred for valuing machinery and plants.
3. Appraisal Method The appraisal method is a common approach that assesses the value of assets based on various factors, including income, cost, and fair market value.

Function of Calculation of Revaluation of Asset

• Update Asset Values: Adjusts the book value of assets to reflect their current market value.
• Accurate Financial Statements : Ensures that financial statements accurately represent the company’s asset values.
• Equity Adjustment : Impacts the company’s equity by recognising changes in asset values.
• Depreciation Calculation : Affects future depreciation expenses based on the revalued asset values.
• Compliance with Standards : Ensures compliance with accounting standards and regulations.
• Financial Decision-Making : Provides accurate information for better financial decision-making and planning.
• Transparency : Enhances transparency for investors and stakeholders by providing a true and fair view of the company’s financial position.

Revaluation of Asset Solved Example

• Original Cost: Perhaps your grandparents bought the table in the 1950s for a few hundred rupees (let's say ₹2,000).
• Carrying Value: Similar to the car example, personal assets likely do not depreciate. So, the carrying value on your records (if any) would remain ₹2,000.
• Market Value: The worth of antique furniture can fluctuate. Recent market trends show similar antique tables selling for around ₹25,000.

Solved Example: Revaluation of Antique Furniture (Rupees)

1. Calculate Carrying Value (assuming no prior adjustments):
   • Carrying Value = Original Cost (as there's no depreciation) = ₹2,000
2. Calculate Revaluation Amount:
   • Revaluation Amount = Market Value - Carrying Value = ₹25,000 - ₹2,000 = ₹23,000