In the field of finance, the revaluation of fixed assets is an action that may be required to accurately depict the true value of the capital goods a business has. This should be distinguished from the planned depreciation, in which the decline in the value of the recorded asset is related to its age.
Fixed assets are held by a company for the purpose of producing rendered goods or services, as opposed to being held for resale for normal business purposes. For example, a machine, a building, a patent or a license may be a fixed asset of a business.
The purpose of the revaluation is to bring into the book the fair market value of fixed assets. It may help to decide whether to invest in another business. If a company wants to sell one of its assets, it is revalued in preparation for a sales negotiation.
Video Revaluation of fixed assets
Reason for revaluation
It is common to see companies reassess their fixed assets. It is important to make the distinction between 'private' revaluations and 'public' revaluations made in the financial statements. The purpose is diverse:
- To show the actual rate of return on capital used.
- To save sufficient funds in the business for replacing fixed assets at the end of their useful lives. A provision for depreciation based on historical costs will show an increased profit and lead to excessive dividend payouts.
- To show the fair market value of an asset that has been greatly appreciated since its purchase such as land and building.
- To negotiate a fair price for a company's assets before a merger or acquisition by another company.
- To enable proper internal reconstruction, and external reconstruction.
- To issue shares to existing shareholders (rights offer or advanced offerings).
- To obtain fair market value of assets, in the case of sales and leaseback transactions.
- When a company intends to take a loan from a bank/financial institution by pawning its fixed assets. Proper asset revaluation will enable the company to get higher loan amount.
- Sales of individual assets or a group of assets.
- In a finance company, revaluation reserves are required for regulatory reasons. They are included when calculating company funds to provide a more equitable outlook of resources. Only a portion of the company's total funds (usually around 20%) can be lent or in the hands of one of the opposing parties at a time (large exposure limits).
- To reduce the leverage ratio (debt to equity ratio).
Maps Revaluation of fixed assets
Fixed asset revaluation method
Common methods used in returning assets are:
Indexation
With this method, the index is applied to the asset's cost value to arrive at the current cost of the asset. Indexes by the State Bureau of Statistics department or the Economic Survey can be used for the revaluation of assets.
Current market price (CMP)
- The land value can be estimated using the latest prices for similar parcels sold in the area. However, certain adjustments must be made for the plus and minus of the land owned by the company. This can be done with the help of brokers and land-related agents, or by licensed appraisers.
- The value of a building can be estimated by a real estate agent (real estate agent) or a Chartered Surveyor (in the UK) in a manner similar to land.
- Planting & amp; Machine: CMP can be obtained from suppliers of the assets concerned. This is unlikely to happen if the brand is not available in the market due to the closure of the company that created it. Similarly, direct CMP may not be available for models that have been discontinued or changed by the manufacturer. Comparison of assets for the most similar types available for sale, new or used, can provide an approximate value.
CMP of existing assets = CMP of comparable new assets x Remaining asset useful life/Initial benefit period.
Assessment method
With this method, technical experts are called to conduct a detailed examination of assets in order to determine their fair market value. Appropriate judgments are needed when companies take insurance policies to protect their fixed assets. This ensures that fixed assets are not overly insured or poorly insured. Factors to be considered in determining asset value are as follows:
- Date purchased.
- The width of use is a single shift, double shift, three shifts.
- Type of asset. Are assets a general-purpose or a special-purpose asset?
- Repair & amp; Company maintenance policy.
- The availability of spare parts in the future, especially in the case of imported machinery.
- Future demand for products produced by an asset.
- If the asset is part of a larger fixed asset, the latter life is very important.
Selective evaluation
Selective assessment can be defined as a revaluation of a particular asset in a class or all assets in a particular location.
Manufacturing companies may have their manufacturing facilities scattered in various locations. Suppose they decide to revalue the factory & amp; machine. Selective assessment means the revaluation of specific assets (such as boilers, heaters, central air conditioning systems) in all locations, or reassessing all items from the Plant & amp; Machines only in certain locations. Such a reassessment would result in an unrepresentative amount displayed in the Fixed Assets List (FAR). In the case of revaluation of certain assets of a class, while some assets will be shown at the revalued amount, others will be shown at historical cost. The same will happen in case of revaluation of all plant assets & amp; machines in certain locations only.
Inconsistent to rate and depreciate fixed assets on a different basis. Therefore, selective assessment is generally not considered a best practice.
Initial considerations
Revaluation will usually require a liaison between the company's Production Department, the Account Department, the Technical Department, and the external appraiser. To assign the project they must set their conclusions for the following questions:
- Why is revaluation necessary?
- What is the most appropriate method, taking into account the types of fixed assets, legal requirements, availability of necessary information? Should the values ​​arrive with a single method examined with values ​​derived from other methods?
- What assets should be reassessed?
- What is the period in which the revaluation should be completed?
- What guidelines should be set for reassessment?
- What modifications will be required in FAR to show revised numbers replacing historic figures? Similarly, depreciation will be counted twice. One taking into account the historical cost, and the other corresponding to the revalued number.
Upper evaluation
FASB in the US does not allow an upward revaluation of fixed assets to reflect fair market value even though it is mandatory to take into account the cost of impairment in fixed assets (downward revaluation of fixed assets) in accordance with FASB Statement. 144, Accounting for Impairment or Disposal of Long-Lived Assets.
In other countries, upward revaluation is primarily for fixed assets such as land, and real estate whose value continues to increase from year to year. It seems that the concept of upward revaluation of fixed assets such as real estate has not been widely accepted by the majority of companies in the United States for fear of paying property taxes and higher capital gains. Furthermore, the provisions on upward presentation ensure conservative judgment.
UK, Australia and India allow an upward revaluation in the value of fixed assets to bring them in line with fair market value. However, the law requires the disclosure of the revaluation basis, the amount of revaluations made for each asset class (for a specified period after the financial year in which the revaluation is made), and other information. Similarly, the law prohibits the payment of dividends from any reserves made as a result of the revaluation of fixed assets upwards. The law in Australia has been amended recently to allow for the payment of dividends from an increase in the value of noncurrent assets in certain cases where the company meets other liquidity tests (see section 254T of the Corporations Act 2001 (Cth)).
Important points
- An increase in the value of property, plant and equipment due to revaluation of fixed assets is credited to "Reserve Revaluation", and is not available for distribution as dividends. Revaluation Reserves are treated as Capital Reserves.
- Increased depreciation arising from the revaluation of fixed assets is debited to the normal revaluation and depreciation accrue to the Profit and Loss account.
- The selection of the most appropriate revaluation method is very important. The most widely used method is the assessment method. Methods such as indexation, and references to current market prices are also used. However, when these methods are used, they are cross-checked to the value received by using the valuation method.
- When each asset is sold that has previously been revalued, the revaluation in the carrying amount is debited to the Revaluation Reserves.
- When an asset is revalued, each Balance Sheet must be presented for a certain period of time, the amount of increase/decrease made in respect of each asset class. Similarly, an increase/decrease in value must be indicated in place of the original cost.
- In the case of land and buildings, revaluation is desired because its value generally increases over time, and is done every 3 to 5 years. In terms of plants & amp; engine, the revaluation is done only if there is a strong case for it. In the case of depreciable assets such as vehicles, furniture & amp; equipment or office equipment, reassessment is not performed.
- The revaluation should not result in a net book value of an asset exceeding its recoverable value.
Downward valuation
Revaluation does not just mean an upward revision in the book value of an asset. It could also mean a downward revision (also called damage) in the book value of the asset. However, any revised book value decreases from assets are immediately written off to Profit & amp; Lost account. Under IFRS, assets are considered disturbed (and thus written) if their carrying amount is greater than their recoverable amount. The recoverable amount is the greater the value of the asset used (present value of future value) or net realizable value.
Repeat evaluations
In the upward revaluation of fixed assets which had previously been revalued downward, a number of upward revaluations equal to the amount previously charged are credited back to Profit & amp; Loss Account.
- Example:
- Machine 'A' was purchased on 01-04-1999 for $ 100,000. This is depreciated using the Straight-Line Method at a rate of 10% p.a.
See also
- Capital appreciation
- Depreciation
- IFRS Requirements
- Revaluation
Source of the article : Wikipedia
0 Comments