How Do the Accountants Deal with Revaluation?
Revaluation refers to the adjustment that the accountants would make to the recorded values of the assets to reflect their current market value accurately. This is because most companies will usually record the cost of a new asset at the price they bought it. As time passes, the market value of the assets will most probably change. So now, business owners have two choices, that is, to continue valuing those assets at their historical costs or to use the revaluation model.
If they want to implement the revaluation model, they need to update their financial records to reflect the current market values of those assets (Also see Intangible Assets) accurately. However, this is a rather complicated process, which can be challenging for business owners who have no idea about its associated accounting treatments. In this case, hiring in-house accountants or an accounting services in Johor Bahru would be a good choice as they do not need to worry about incorrect calculations that can lead to messy books if they revalue the assets by themselves.
Some would think that the revaluation model and the cost model are the same. However, in fact, they are not. By using the revaluation model, one will be able to adjust the price upwards and downwards to show the increase or decrease in the asset value. In this case, the increase is known as appreciation, while the decrease is called the depreciation. If one uses the cost model, on the other hand, he will only be able to adjust the asset price downwards to recognise impairment losses.
The revaluation model can help some businesses under certain conditions. For example, it can help the company in the preparation of the sale of assets. This is for the business owners to know the current market values of assets that have experienced an increase in value after they purchased them. Even if the company has no intention of selling its assets, revaluation can help business owners to know whether they have enough funds to replace the old assets with the new ones. In the case of mergers and acquisitions, by using the revaluation model, it can negotiate with the company that wants to merge with it or acquire it to get a fair price.
When the revaluation is positive, it means that the value of the asset has increased. To show the gain in value, business owners need to adjust the book value of that asset. Instead of recording this in the company’s income statement, they should credit the gain to the revaluation surplus account. This is an equity account, and it contains all the positive revaluations of the assets (Also see How Do Assets and Equity Differ from Each Other?) unless the company sells or disposes of those assets.
If the revaluation is negative, it indicates that the book value of the assets has decreased as a result of impairment. When this occurs, business owners should write off the loss against revaluation surplus, if there is any. If there is no surplus, or if the amount of loss is higher than that of the surplus, they need to report the difference as the impairment loss instead.