Revaluation Surplus: A Comprehensive Overview

Understanding Revaluation Surplus

Revaluation surplus is an equity account used in financial accounting to capture increases in the fair value of an asset over its previous carrying amount (book value). It is typically employed under the Revaluation Model of accounting for fixed assets, particularly in systems that follow the International Financial Reporting Standards (IFRS).

Key Points Regarding Revaluation Surplus

1. Equity AccountRevaluation surplus is an equity account, which means it represents part of the owner’s equity in the company. However, this equity is not typically distributable as dividends because it represents unrealized gains on assets. (SuperfastCPA, 2023)
2. UsageRevaluation surplus is used when assets, usually long-term tangible assets like land and buildings, are revalued to their current market values. (SuperfastCPA, 2023)
3. Increase in ValueWhen an asset’s value is increased upon revaluation, the increase is credited to the revaluation surplus account. (Coursesidekick, 2024)
4. Decrease in ValueIf an asset’s value is decreased upon revaluation, the decrease is first charged against any existing revaluation surplus for that asset. If the decrease exceeds the available surplus, the excess is recognized as a loss in the income statement. (Coursesidekick, 2024)
5. Sale of Revalued AssetWhen a revalued asset is sold, the portion of the revaluation surplus that relates to that asset can be transferred to retained earnings. This is because the surplus, which was previously unrealized, becomes realized upon the sale of the asset. However, it doesn’t pass through the income statement. (SuperfastCPA, 2023)

Accounting Treatment of Revaluation Surplus

When an asset is revalued upwards, the increase in value (the difference between the asset’s new fair value and its previous carrying amount) is credited to the revaluation surplus account. Conversely, a decrease in an asset’s value due to revaluation would first be offset against any previous revaluation surpluses related to the same asset before being recognized as an expense. (SuperfastCPA, 2023)

Example of Revaluation Surplus

GreenTech Ltd., a manufacturing company, owns a piece of industrial land. This land was bought 5 years ago at a price of $2 million. Due to a recent infrastructural boom in the area, property values have skyrocketed. The company decides to revalue its land to reflect the current market value, which is assessed to be $3 million. The increase in value of $1 million is credited to the revaluation surplus account. (SuperfastCPA, 2023)

Conclusion

Revaluation surplus is an important concept in financial accounting that allows companies to recognize increases in the fair value of their assets. It provides a mechanism to adjust the carrying amount of assets to reflect their current market values, while ensuring that unrealized gains are not recognized as income until they are realized through a sale or other disposition of the asset.

References

1. Coursesidekick. (2024). Impairment of Assets. Retrieved from https://www.coursesidekick.com/accounting/study-guides/boundless-accounting/impairment-of-assets
2. SuperfastCPA. (2023). What is Revaluation Surplus? Retrieved from https://www.superfastcpa.com/what-is-revaluation-surplus/
3. ACCA Global. (2023). Property, plant and equipment. Retrieved from https://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-exams-study-resources/f7/technical-articles/ppe.html

FAQs

What is revaluation surplus?

Revaluation surplus is an equity account used in financial accounting to capture increases in the fair value of an asset over its previous carrying amount (book value).

When is revaluation surplus used?

Revaluation surplus is used when assets, usually long-term tangible assets like land and buildings, are revalued to their current market values.

How is revaluation surplus accounted for?

When an asset is revalued upwards, the increase in value is credited to the revaluation surplus account. Conversely, a decrease in an asset’s value due to revaluation would first be offset against any previous revaluation surpluses related to the same asset before being recognized as an expense.

Is revaluation surplus a credit or debit?

Revaluation surplus is a credit balance in the equity section of the balance sheet.

What happens to revaluation surplus when an asset is sold?

When a revalued asset is sold, the portion of the revaluation surplus that relates to that asset can be transferred to retained earnings.

Why is revaluation surplus not distributable as dividends?

Revaluation surplus is not typically distributable as dividends because it represents unrealized gains on assets.

How does revaluation surplus impact depreciation?

After an asset has been revalued, the asset’s depreciation expense must change to reflect the new value. The asset’s new book value can be divided by its remaining useful life to adjust the amount of depreciation expense reported on the income statement.

What are the advantages and disadvantages of using the revaluation model?

Advantages:

• Provides a more accurate reflection of the current value of assets
• Can help to improve financial ratios and borrowing capacity
• Can be used to defer or accelerate taxable gains or losses

Disadvantages:

• Can be complex and time-consuming to implement
• May result in volatile financial statements
• Can lead to the recognition of unrealized gains or losses