Revaluation surplus is an accounting concept used to record the increase in the fair value of an asset over its previous carrying amount (book value). This article delves into the accounting treatment of revaluation surplus under International Financial Reporting Standards (IFRS), exploring its recognition, measurement, and presentation on the balance sheet.
Key Facts
- Revaluation surplus is an equity account used to capture increases in the fair value of an asset over its previous carrying amount (book value).
- Under IFRS, a revaluation surplus (gain) is recorded to other comprehensive income (OCI) on the balance sheet.
- Revaluation surplus is typically used when assets, especially long-term tangible assets like land and buildings, are revalued to their current market values.
- When an asset is revalued upwards, the increase in value is credited to the revaluation surplus account.
- Conversely, if an asset’s value decreases 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.
- When 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.
Recognition of Revaluation Surplus
Under IFRS, revaluation surplus arises when an asset is revalued to its fair value, resulting in an increase in its carrying amount. The revaluation surplus is recognized as other comprehensive income (OCI) in the equity section of the balance sheet. OCI is a component of shareholders’ equity that records gains and losses that are not recognized in the income statement.
Measurement of Revaluation Surplus
The revaluation surplus is measured as the difference between the asset’s fair value and its previous carrying amount. The fair value is determined using various valuation techniques, such as market prices, discounted cash flows, or appraisals. The revaluation surplus is adjusted periodically to reflect changes in the asset’s fair value.
Presentation of Revaluation Surplus
The revaluation surplus is presented as a separate line item in the equity section of the balance sheet. It is typically disclosed as a component of accumulated other comprehensive income. The revaluation surplus is not included in the determination of net income or loss, as it represents unrealized gains or losses.
Treatment of Revaluation Surplus Upon Sale of Asset
When a revalued asset is sold, the portion of the revaluation surplus related to that asset is transferred to retained earnings. This is because the surplus, which was previously unrealized, becomes realized upon the sale of the asset. The transfer of revaluation surplus to retained earnings does not pass through the income statement.
Conclusion
Revaluation surplus is an important concept in IFRS accounting. It allows companies to recognize the fair value of their assets, providing a more accurate representation of their financial position. The accounting treatment of revaluation surplus ensures that unrealized gains and losses are appropriately recorded and disclosed in the financial statements.
References
- Universal CPA Review. (n.d.). How are revaluation surplus’s or losses recorded under IFRS?. Retrieved from https://www.universalcpareview.com/ask-joey/how-are-revaluation-surpluss-or-losses-recorded-under-ifrs/
- SuperfastCPA CPA Review. (n.d.). What is Revaluation Surplus?. Retrieved from https://www.superfastcpa.com/what-is-revaluation-surplus/
- Investopedia. (2020, September 27). Understanding Revaluation Reserve and How It Is Recorded. Retrieved from https://www.investopedia.com/terms/r/revaluationreserves.asp
FAQs
What is revaluation surplus?
Revaluation surplus is an equity account used to record the increase in the fair value of an asset over its previous carrying amount (book value).
Where is revaluation surplus presented on the balance sheet?
Revaluation surplus is presented as a separate line item in the equity section of the balance sheet, typically disclosed as a component of accumulated other comprehensive income.
How is revaluation surplus measured?
Revaluation surplus is measured as the difference between the asset’s fair value and its previous carrying amount. The fair value is determined using various valuation techniques, such as market prices, discounted cash flows, or appraisals.
How is revaluation surplus treated when an asset is sold?
When a revalued asset is sold, the portion of the revaluation surplus related to that asset is transferred to retained earnings. This is because the surplus, which was previously unrealized, becomes realized upon the sale of the asset.
Why is revaluation surplus not included in net income or loss?
Revaluation surplus is not included in net income or loss because it represents unrealized gains or losses. Unrealized gains or losses are not recognized in the income statement until they are realized, such as through the sale of an asset.
What are the implications of revaluation surplus for financial statement users?
Revaluation surplus provides financial statement users with a more accurate representation of the fair value of a company’s assets. This information can be useful for making investment and lending decisions.
Are there any limitations to the use of revaluation surplus?
Yes, there are some limitations to the use of revaluation surplus. For example, revaluation surplus can be subject to manipulation and abuse. Additionally, revaluation surplus may not be appropriate for all types of assets.
What are the accounting standards that govern the treatment of revaluation surplus?
The accounting standards that govern the treatment of revaluation surplus are International Financial Reporting Standards (IFRS). IFRS provides guidance on the recognition, measurement, and presentation of revaluation surplus in the financial statements.