Revaluation of fixed assets is undertaken to determine current value of the assets owned by the organization. The organization carried out this activity in addition to the usual depreciation an asset goes through during the useful life.
Revaluation of fixed assets is the process by which the carrying value of fixed assets is adjusted upwards or downwards in response to major changes in its fair market value. Traditional International Accounting Standards (IAS) which is replaced by International financial reporting standard (IFRS) in January 2019 require fixed assets to be initially recorded at cost but they allow two models for subsequent accounting for fixed assets, namely the cost model and the revaluation model.
Revaluation of assets is to determine the positive difference between an asset's fair market value and its original cost, less depreciation. Revaluations are recognized in a firm's equity and do not affect the income statement. The values of all of a firm's assets must be recognized and documented in their accounts. The initial values of these assets are taken from their current market values. Some assets fluctuate over time due to changes in market value. When an asset increases in value, a revaluation is necessary. If the asset were to decrease in value, then an impairment would be necessary.
Purpose:
One of the main reasons to carry out revaluation regularly is to determine fair market value of the asset. Other reasons are:
- Showcase the true and fair value to the stakeholders.
- For the negotiation of true and fair value before undertaking any merger or acquisition.
- True return on the capital employed by an organization into the business.
- Provision of necessary funds in the business for Replacement of old assets at the end of their useful lives.
- To arrive fair value to carry out a Sale and Leaseback transaction
of an asset.
Sale and Leaseback is a simple financial transaction which allows person to lease asset to himself after selling it. Here an asset previously owned by seller is sold to someone else and is leased back to the first owner for long term. This allows person to use the asset and not own it. Company usually enters a leaseback transaction for accounting and taxation purpose.
Sale and Leaseback transactions are common in Real Estate Investment Trusts (REITs)
- Sale of an asset or a group of assets.
- Regulatory compliance makes it mandatory to revalue assets from time to time basis.
In the cost model, the carrying value of fixed assets equals their historical cost less accumulated depreciation and accumulated impairment losses. There is no upward adjustment to value due to changing circumstances.
In revaluation model, an asset is initially recorded at cost but subsequently it’s carrying amount is increased to account for any appreciation in value. The difference between the cost model and the revaluation model is that the revaluation model allows both downward and upward adjustment in value of an asset while cost model allows only downward adjustment due to impairment loss.
Its very important for real estate to keep appreciating its value to meet the needs of tangible and intangible nature ever in future. Thus, Neelam Arch is your partner to deliver you the report you can trust on and make your decision based on current facts and not historical data or obsolete practices.
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