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| Corporate Practice bd |
Revaluation of fixed assets involves adjusting the book value of an asset to its current fair market value. This process is done to reflect more accurately the asset’s true value in the financial statements. Here's how the accounting treatment for the revaluation of fixed assets is handled:
Key Concepts
Revaluation Surplus:
If the fair value of the asset increases, the difference between the new fair value and the carrying amount is recorded as a revaluation surplus in equity.
Revaluation Deficit:
If the fair value of the asset decreases, the difference is initially recorded against any revaluation surplus in equity (if any), and any remaining deficit is recognized as an expense.
Depreciation:
After revaluation, depreciation is calculated based on the revalued amount over the asset’s remaining useful life.
Accounting Entries for Revaluation
1.Revaluation Surplus:
When the fair value of an asset increases:
Journal Entry:
Asset Account (Increase in asset value) Dr
To Revaluation Surplus (Equity) Cr
Example:
Assume a piece of machinery was initially recorded at Tk. 100,000, with accumulated depreciation of Tk. 20,000, making its carrying amount Tk. 80,000. If the fair value is revalued to Tk. 120,000:
Increase in asset value:
Machinery Account 40,000 Dr
To Revaluation
Surplus 40,000 CR
2. Revaluation Deficit
When the fair value of an asset decreases:
If there was a previous revaluation surplus: Journal Entry:
Revaluation Surplus (Equity) Dr
To Asset Account (Decrease in asset value) Cr
If there was no previous revaluation surplus or the deficit exceeds the surplus:
Journal Entry:
Loss on Revaluation (Expense) Dr
To Asset Account (Decrease in asset value) Cr
Example:
Continuing the previous example, if the fair value of the machinery drops to Tk. 70,000:
Decrease in asset value (assuming no prior surplus):
Loss on Revaluation 10,000 Dr
To Machinery
Account 10,000 CR
Subsequent Depreciation
After revaluation, depreciation is based on the revalued amount over the remaining useful life of the asset.
Example:
If the machinery (revalued to Tk. 120,000) has a remaining useful life of 5 years, annual depreciation would be:
Annual Depreciation:
Depreciation Expense 24,000 Dr
To Accumulated Depreciation 24,000 CR
Comprehensive Example
Initial Revaluation:
- Increase in Asset Value:
- Initial carrying amount: Tk. 80,000
- Revalued amount: Tk. 120,000
- Increase: Tk. 40,000
Journal Entry:
Machinery Account 40,000 Dr
To Revaluation
Surplus 40,000 CR
Subsequent Decrease in Value:
- Decrease in Asset Value:
- New fair value: Tk. 70,000
- Revalued amount: Tk. 120,000
- Decrease: Tk. 50,000
Journal Entry:
- Assuming Tk. 40,000 surplus:
Revaluation Surplus 40,000 Dr
To Machinery
Account 40,000 CR
Remaining deficit of Tk. 10,000:
Loss on Revaluation 10,000 Dr
To Machinery
Account 10,000 CR
Depreciation After Revaluation:
- Revalued amount: Tk. 120,000
- Remaining useful life: 5 years
Journal Entry:
Depreciation Expense 24,000 Dr
To Accumulated
Depreciation 24,000 CR
Summary:
1.Revaluation Surplus:
Asset Account Dr
To Revaluation Surplus (Equity) Cr
2.Revaluation Deficit:
Against previous surplus:
Revaluation Surplus (Equity) Dr
To Asset Account Cr
No previous surplus:
Loss on Revaluation (Expense) Dr
To Asset Account Cr
3.Subsequent Depreciation:
Depreciation Expense Dr
To Accumulated Depreciation Cr
These entries ensure that the financial statements accurately reflect the current value of the fixed assets, providing more relevant and reliable information to users of the financial statements.