Revaluation

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

11 September 2013 How to treat and record the expenses incured for the transaction Revaluation of of land & building ? In financial statements ? What is the cardinal principal of taxation?

CA Pallav Singhania

CA Pallav Singhania (Expert)
Follow

12 September 2013 Revaluation has been permissible under various enactments in different countries due to price level changes or due to devaluation of local currencies purely for adjustment of accounting information and not necessarily for tax assessment.

However, in some countries like Korea, France, and certain Latin American countries, business enterprises were permitted during hyper-inflation to revalue and to have certain tax benefits, and to strengthen their financial position or to issue bonus shares.

CA Pallav Singhania

CA Pallav Singhania (Expert)
Follow

12 September 2013 Permanent Revaluation Reserve Method
Under this approach, a reserve called "revaluation reserve" equivalent to the amount added to the cost of the fixed assets on account of revaluation is created.

The revaluation reserve is a permanent reserve and appears in the blance-sheet till the assets exist in the enterprise, it represents "unrealised profit" and is not available for distribution of dividend or for writing off of the operating losses or unobsorbed depreciation.

The fixed assets are shown in the balance-sheet at the revalued amount, and depreciation thereon is provided (on the revalued amount), and thus the income statement contains depreciation in current value terms.

Accordingly, networth and capital employed of the enterprise increase by the amount of revaluation reserve; and the depreciation charge in the income statement is in terms of current values of the assets, and thus the resultant profit is reduced.

Profit (or loss) in the income statement is based on the principle of matching depreciation expense and sales revenue in the same monetary terms.

Profit (or loss) reported in the income statement is the earnings on account of business operations and such operating income gets segregated from "holding income". Thus, this approach recognizes the effects of changing prices in the financial statements and such revaluation practice is an alternative to accounting for change in price-level.

CA Pallav Singhania

CA Pallav Singhania (Expert)
Follow

12 September 2013 Accounting Entry will be as follows:

Fixed Asset A/c Dr.
To Revaluation Reserve
{On revaluation of the Asset}

Revaluation Reserve
To Accumulated Depreciation
{For Depreciation in the end of every year}

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now