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Revaluation a/c

Rahul (.) (303 Points)

30 November 2011

Hi, I have some doubts on treatment of revaluation gain and loss. Is suppose we have revalued certain assets. There is a total revaluation gain of rs 5000 for one asset and revaluation loss of rs 3000 for another asset/liability.

Kindly let me know the treatment of the same . Whether the full amount will be dibited/credited in one 'Revaluation Account' or seperate 'Revaluation Gain' and ' Realution Loss' accounts should be opened? and in the P&L a/c whether we need to show both the gain and loss a/c.

What is the source of the correct treatment? Accounting Standards or Compnaies Act? Kindly Explain

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7 Replies

RUPESH CHOUDHURY (Student) (484 Points)
Replied 30 November 2011

Dear Rahul,

I couldnt find the expression of separate treatment of reserves arising out of revaluation of different assets in any AS,GN,ASI or Companies Act.

Hence the reserves arising should be directly appropriated though the Revaluation Reserves A/c only.

Regards,

Rupesh

(Guest)

Only single Revaluation account to be prepared, and all increases and decreases of assets and liabilities must be shown here.

By Incorporating Changes in the Balance sheet values prepare : Revaluation Account

(i) For decrease in the value of assets, increase in the value of liabilities, provision for

unrecorded liabilities Revaluation A/c Dr

To Assets A/c (with the decrease in value)

To Liabilities A/c (with the increase in value)

(ii) For increase in the value of assets, decrease in the value of liabilities, unrecorded

assets

Assets A/c Dr (with the increase in value)

Liabilities A/c Dr (with the decrease in value)

To Revaluation A/c

(iii) For profit on revaluation :

Revaluation A/c Dr

To old partners capital A/c (in their old profit sharing ratio)

[ For loss on revaluation, the reverse entry should be made ]

Proforma of Revaluation Account

Dr. Cr.

To Assets (Decreased value)	xxx	By Assets (increased value)	xxx
To liabilities (increased value)	xxx	By Liabilities (Decreased value)	xxx
To partners capital a/c (share of Revaluation profit)	xxx	By Partners capital a/c (share of Revaluation loss)	xxx

Smriti Dhawan (Company Secretary ) (347 Points)
Replied 30 November 2011

I agree with Mr. Rupesh, Revaluation Reserve will be created for Rs. 2000 only

This has reference to the Calculation of Depreciation whether on the revalued amount of fixed asset or on the WDV of the Fixed Asset. Section 205 and 350 of the Companies Act does not silent about the calculation of Depreciation whether on revalued amount or on the WDV of the Fixed asset.

AS PER ACCOUNTING STANDARD 6

Para“26”Where the Depreciable asset are revalued, the provision for depreciation should be based on the revalued amount and on the estimate of the remaining useful lives of such assets. In case the revaluation has a material effect on the amount of depreciation, the same should be disclosed separately in the year in which revaluation is carried out.”

AS PER INDIAN GAAP.

It is significant to note that the Indian GAAP permits revaluation of fixed assets even if results in an upward revision of the valuation. Any increase in the valuation should be credited to revaluation reserve. The additional depreciation relatable to revaluate should be adjusted against revaluation reserve.

AS PER ICAI GUIDANCE NOTED ON TREATMENT OF RESERVE CREATED ON REVALUATION OF FIXED ASSETS

Depreciation is required to be provided with reference to the total value of Fixed Assets as appearing in the accounting after revaluation. However for certain statutory purposes, e.g. dividends, managerial remuneration etc. depreciation is relatable to historical cost.

Taking transfer from Revaluation Reserve to cover extra depreciation arising out of revaluation of fixed assets is allowed. However, it is prudent not to take such transfer.

UTILISATION OF REVALUATION RESERVE TO NULLIFY THE IMPACT OF EXTRA DEPRICIATION ON REVALAUED ASSET

Revaluation reserve can be used to nullify the effect of additional depreciation arising out of revaluation of fixed assets. AS 6 in para 26 states that "where the depreciable assets are revalued, the provision for depreciation should be based on the revalued amount and on the estimate of the remaining useful lives of such assets". Thus, there is an additional depreciation charge on account of revaluation. The issue here is whether this additional depreciation can be charged against revaluation reserve.

AS 10 and AS 6 are silent on the treatment of such additional depreciation. However, the ICAI has issued a Guidance Note on Treatment of Reserve created on Revaluation of Fixed Assets. Para 12 of this Guidance Note suggests that "it will be prudent not to charge additional depreciation against revaluation reserve". However, in other paras, the Guidance Note allows utilizing revaluation reserve to nullify the effect of additional depreciation. It is further suggested that company will have to provide for full depreciation in the profit and loss account and thereafter it can take transfer from revaluation reserve to adjust additional depreciation. Mostly, companies do not opt for the more prudent policy of not adjusting additional depreciation.

Depreciation is charged on the value of revalued asset and the difference of the asset arises out of revaluation of asset is debited to revaluation reserve only .The extra depreciation charged on revalued asset is not burden on profit and loss account in-fact revaluation of assets does not mean realized profit it is merely a notional entry therefore enhanced depreciation on the enhanced value of the asset should not affect the profit and loss account and enhanced depreciation on accounts of depreciation should be adjusted out of revaluation reserve

There may be two method of transferring the amount of additional Depreciation on Fixed asset on revaluation Reserve:

1) DIRECTLY TRANSFERRING THE AMOUNT OF EXTRA DEPRECIATION ON REVALUED ASSET TO REVALUATION RESERVE

i) Depreciation A/c ….. Dr.

To Fixed asset A/c

(with total amount of Depreciation including the extra

amount on the revalued value of fixed asset)

ii) Revaluation Reserve A/c ….Dr.

To Depreciation A/c

(Transferring the amount of Extra amount of Depreciation to

Revaluation Reserve Account)

iii) Profit and Loss A/c ….. Dr.

To Depreciation A/c

( transferring only the amount of Depreciation

as per WDV to Profit and loss A/c)

2) AS PER THE ICAI GUIDELINES, THE PRUDENT METHOD IS TO FIRST TRANSFER THE WHOLE AMOUNT OF DEPRECIATION TO PROFIT AND LOSS ACCOUNT THAN TRANSFERRING THE EXTRA AMOUNT OF DEPRECIATION TO REVALUATION RESERVE.

i) Depreciation A/c ….. Dr.

To Fixed asset

(with Total amount of Depreciation including the extra

amount on the revalued value of fixed asset)

ii) Profit and Loss A/c ….Dr.

To Depreciation A/c

( With whole amount of Depreciation Including

the amount of extra Depreciation on Revaluation of Fixed asset)

iii) Revaluation Reserve A/c …. Dr.

To Profit and Loss A/c

( With the amount of Extra Depreciation on the revalued Fixed asset)

Depreciation will be charged on Revalued value of Fixed asset and the extra amount of depreciation will be transferred to Revaluation Reserve. It will have no impact on the amount of Profit of the company. Only the Depreciation on WDV will charged from the Profit and Loss A/c of the Company

1 Like

Arijit Bhattacharjee (ACA, M.COM) (407 Points)
Replied 30 November 2011

Rahul Ji, seedhi Baat

Revalaution = intention to increase value of asset above book value

Downward Reval. possible to the extent of asset previously upward valued (AS-12, AS-6)

Devalation =getting the value of an asset go down from its Book Value

is Technically known as "Impairment of Asset"(AS-28)

for writting value down simply create a "Provision for Impairment Losses"

Revaluation and Impairment are two clear issues and cannot be interwined or set off

For further Clarification Please refer the Explanations by experts like Parveen Sharma Sir/Dolphy desouza/

D S Rawat

Cheers......

CA. Kunal Lakhotia (ACA) (1006 Points)
Replied 30 November 2011

Originally posted by : Harini
	Only single Revaluation account to be prepared, and all increases and decreases of assets and liabilities must be shown here. By Incorporating Changes in the Balance sheet values prepare : Revaluation Account (i) For decrease in the value of assets, increase in the value of liabilities, provision for unrecorded liabilities Revaluation A/c Dr To Assets A/c (with the decrease in value) To Liabilities A/c (with the increase in value) (ii) For increase in the value of assets, decrease in the value of liabilities, unrecorded assets Assets A/c Dr (with the increase in value) Liabilities A/c Dr (with the decrease in value) To Revaluation A/c (iii) For profit on revaluation : Revaluation A/c Dr To old partners capital A/c (in their old profit sharing ratio) [ For loss on revaluation, the reverse entry should be made ] Proforma of Revaluation Account Dr. Cr. To Assets (Decreased value) xxx By Assets (increased value) xxx To liabilities (increased value) xxx By Liabilities (Decreased value) xxx To partners capital a/c (share of Revaluation profit) xxx By Partners capital a/c (share of Revaluation loss) xxx