Revaluation reserve

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Querist : Anonymous

Querist : Anonymous (Querist)

12 August 2017 If revaluation reserve is a non cash item then how any transfer from revaluation reserve to profit and loss account is possible?

CA Rashmi Gandhi

CA Rashmi Gandhi (Expert)
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12 August 2017 Unable to understand your query....Elaborate it....

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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21 July 2025 Excellent question.

You're absolutely right in observing that Revaluation Reserve is a non-cash item. This forms the basis for why any transfer from Revaluation Reserve to the Profit and Loss Account is generally not permitted under accounting standards.

Let me explain in more detail.

🔍 Why Revaluation Reserve is a Non-Cash Item:
When a company revalues its fixed assets upward, it increases the book value of the asset and simultaneously credits Revaluation Reserve in equity.

This does not involve any cash inflow — it's merely an accounting adjustment reflecting a notional increase in asset value.

Hence, Revaluation Reserve is an unrealized gain.

📘 What Accounting Standards Say:
✅ Under AS 10 (Revised) and the ICAI Guidance Note:
Revaluation Reserve should not be transferred to the Profit and Loss Account.

Instead, it can be:

Transferred directly to General Reserve when the asset is disposed of, or

Transferred proportionately to General Reserve as the asset is depreciated (i.e., on a systematic basis).

✅ Under Ind AS 16 (if applicable):
Revaluation Surplus (same as Revaluation Reserve) is not routed through P&L.

It is shown in Other Comprehensive Income (OCI) and accumulated in equity.

Upon disposal of the asset, the surplus may be transferred directly to Retained Earnings — not through P&L.

❌ Why Transfer to P&L Is Not Allowed:
The Profit and Loss Account reflects realized, operating results, and revaluation gains are unrealized.

Transferring revaluation reserve to P&L would mislead users of financial statements into thinking there is an operational gain or income — when in fact, no such cash or real transaction occurred.

✅ What is Permitted?
Action Permitted? Notes
Transfer of Revaluation Reserve to P&L ❌ Not allowed It's a non-cash/unrealized gain
Transfer to General Reserve or Retained Earnings ✅ Allowed On disposal or over time (e.g., via depreciation)
Disclosure of Transfer ✅ Required Should be clearly shown in notes to accounts

📝 Illustration:
If asset revalued from ₹100 to ₹150 (revaluation reserve ₹50), and the asset is later sold for ₹180:

Profit on sale (based on historical cost) = ₹80 (₹180 – ₹100)

Revaluation Reserve ₹50 can be transferred to General Reserve, not P&L.

📌 Conclusion:
Revaluation Reserve is non-cash and unrealized, so should not be transferred to the Profit and Loss Account.

Transfers are permitted only to General Reserve (or Retained Earnings), and this must be done through equity, not through the income statement.

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