Plant, property, and equipment (PPE) are also known as fixed assets and are used in the production process or supply of goods and services, administrative purposes, or any other activities in the business. The Singapore Financial Reporting Standards, FRS 16 – Property, Plant and Equipment allows business the accounts preparer to measure the value of fixed assets in two ways; revaluation model and historical cost model. This article will focus on revaluation of fixed assets.
Fixed asset revaluation involves increasing or decreasing the carrying value of a fixed asset in case of major variations in the fixed asset’s fair market value. Note that revaluation is different from planned depreciation which is always related to the age of the fixed asset.
Why revalue your business fixed assets?
You can revalue your business fixed assets due to the following;
- To calculate the exact return on capital associated with the asset
- To determine the fixed asset’s fair market value especially after a significant appreciation since you acquired the asset.
- To get a loan from the bank by using the asset as collateral (correct revaluation might result in higher loan amount).
- To negotiate a better price for the asset if your business is acquired by another company
Downward asset revaluation
Downward asset revaluation results in decreased book value of the fixed asset (Also see Impairment versus Depreciation of Fixed Assets). Note that you should report the loss (decrease) in your business income statement. If the carrying amount of the asset increases in future, perhaps due to an increase in the fair market value, you should report this increase as profit in your business income statement (Also see 4 Tips for Analyzing an Income Statement). Note that this increase should only be reported to the extent of loss you reported previously for the same asset. The excess profit realized after revaluing the asset should be reported in the shareholders’ equity as a comprehensive income.
Upward asset revaluation results in an increase in the carrying value of the asset. This gain (profit) should be reported in the shareholders’ equity under the comprehensive income category as revaluation surplus. This implies that upward asset revaluation results in increased shareholders’ equity and lowers the net income due to high depreciation.
Effects of asset revaluation
The following are the effects of asset revaluation.
- Decrease in the value of the asset lowers the net income.
- Increased asset book value results increased equity and total assets which in turn lowers leverage.
- Decease in the carrying amount of a fixed asset lowers the ROE and ROA
Revaluation of fixed assets is an important concept in accounting because it impacts various financial statements. Engage an accounting service Singapore if you need assistance.