Accounting Entries for Revaluation of Fixed Assets

Revaluation of fixed assets involves adjusting the book value of an asset to reflect its current fair market value. This process ensures that the asset’s value on the balance sheet is not materially different from its recoverable amount. The revaluation can result in either an upward (gain) or downward (loss) adjustment and must be recorded in accordance with applicable accounting standards such as IAS 16 – Property, Plant and Equipment.

1. Purpose of Revaluing Fixed Assets

  • Reflect Fair Value: Ensure the asset’s carrying amount is up to date and realistic.
  • Improve Accuracy of Financial Statements: Provide users with a true and fair view of the company’s assets.
  • Comply with Accounting Standards: Required under IFRS when the revaluation model is chosen.

2. Upward Revaluation of Fixed Assets

When an asset’s fair value exceeds its carrying amount, the increase is recognized in equity under the revaluation surplus (unless it reverses a previous revaluation decrease).

Journal Entry:

  • Dr Asset Account (e.g., Land or Building)
  • Cr Revaluation Surplus (Equity – OCI)

Example:

If a building’s carrying value is $300,000 and it’s revalued to $350,000:

  • Dr Building $50,000
  • Cr Revaluation Surplus $50,000

3. Downward Revaluation of Fixed Assets

If the fair value of an asset falls below its carrying amount, the decrease is recognized as a loss in profit or loss, unless it reverses a previous upward revaluation in equity.

Journal Entry:

  • Dr Revaluation Surplus (if available)
  • Dr Profit or Loss (for remaining amount)
  • Cr Asset Account

Example:

If a machine is revalued down from $100,000 to $85,000:

  • Dr Profit or Loss $15,000
  • Cr Machinery $15,000

4. Depreciation Adjustment After Revaluation

  • New Depreciation Base: Recalculate depreciation based on the revalued amount and remaining useful life.
  • No Retroactive Effect: Adjustments apply prospectively from the revaluation date.

Example:

If a building is revalued to $500,000 with 10 years remaining life:

  • Annual Depreciation: $500,000 ÷ 10 = $50,000

5. Disposal of Revalued Asset

  • Revaluation Surplus Transfer: The revaluation surplus related to the asset can be transferred to retained earnings upon disposal.
  • Journal Entry:
    • Dr Revaluation Surplus
    • Cr Retained Earnings

Key Takeaways in Accounting for Revaluations

Proper accounting for revaluation of fixed assets ensures transparency and compliance with IFRS. Entities must assess fair value reliably, recognize revaluation gains and losses appropriately, and disclose all changes in accordance with financial reporting standards.