Back to: Financial Accounting
Good day, class.
Today, we are discussing the revaluation of non-current assets, a key concept in financial reporting. Non-current assets include property, plant, and equipment that are used in the business for more than one year.
Revaluation of Non-Current Assets
1. What is Revaluation?
Revaluation means adjusting the value of a non-current asset to reflect its current market value instead of its original cost. This is done when the market value of the asset has significantly increased or decreased, and the business wants its books to reflect a more accurate and fair value.
2. Reasons for Revaluation
To reflect fair value in the balance sheet
To update values for assets that have appreciated (e.g. land or buildings)
To support borrowing or attract investors
For insurance or reporting purposes
Required by accounting standards in some cases
3. Revaluation Model (IAS 16)
According to IAS 16 – Property, Plant and Equipment, a business may choose between:
Cost Model: Keep the asset at original cost less depreciation
Revaluation Model: Revalue asset to fair value, then deduct depreciation going forward
If the revaluation model is used, all assets in that class (for example, all buildings) must be revalued regularly
4. How Revaluation Affects the Accounts
If the asset’s value increases, the surplus is added to a new account called the Revaluation Reserve (under equity)
If the asset’s value decreases, it is recorded as an expense (loss) in the income statement – unless a previous revaluation surplus exists
5. Example (Increase in Value)
A building was bought for N5,000,000. After 3 years, it is revalued to N6,200,000. The increase of N1,200,000 is recorded as:
Debit: Building (Asset) N1,200,000
Credit: Revaluation Reserve (Equity) N1,200,000
Depreciation from now on will be based on the new value.
6. Example (Decrease in Value)
If the same building is revalued down to N4,500,000, the N500,000 drop is recorded as:
Debit: Revaluation Loss (Expense) N500,000
Credit: Building (Asset) N500,000
But if there’s a Revaluation Reserve from previous years, the loss can first be offset against that reserve.
7. Impact of Revaluation
Balance Sheet: Asset values and equity change
Depreciation: Increases if the asset’s value goes up
Profit or Loss: A decrease in value can reduce profit
Revaluation Reserve: Not distributable as dividends – it is part of equity, not income
In summary:
Revaluations must be done consistently and regularly
Only fair value increases go into the Revaluation Reserve
Depreciation is still charged after revaluation, based on the new value and remaining useful life
Conclusion
Revaluing non-current assets helps to present a true and fair view of the financial position of a business. However, it must be done carefully, with proper documentation, and in line with accounting standards.