Revaluation reserve: what it is and how it’s recorded
A revaluation reserve is a balance-sheet line used to reflect changes in the carrying value of long‑term assets when their fair value diverges materially from their book value. It helps companies track unrealized valuation changes (common for real estate or foreign‑currency–sensitive assets) without immediately distributing those gains as profit.
Why companies use a revaluation reserve
- To present asset values that better reflect current market conditions between scheduled depreciation or amortization adjustments.
- To separate unrealized gains (which flow to equity) from realized profit or loss.
- To provide flexibility for frequent or volatile valuations (e.g., property values or assets affected by currency movement).
How revaluation adjustments are recorded
Revaluation impacts both the balance sheet and, depending on the circumstances, profit or loss.
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Typical journal entries:
* When an asset increases to a higher fair value:
* Debit the asset (increase carrying amount).
* Credit revaluation surplus (equity) for the unrealized gain.
* When an asset decreases in value:
* If a prior revaluation surplus exists for that asset, debit the revaluation surplus to the extent of that surplus (reducing equity).
* Any excess decrease beyond prior surpluses is recognized in profit or loss (debit an expense account).
* Credit the asset (reduce carrying amount).
Companies may adjust the revaluation reserve as needed (not only at scheduled reporting dates) to keep carrying amounts aligned with fair value estimates.
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Book value vs. fair value
- Book value (carrying amount) equals cost less accumulated depreciation or amortization.
- Fair value is the market value estimate at a point in time.
- Long‑term, less liquid assets are typically carried at book value unless revaluation is warranted; shorter‑term, more liquid assets are often reported closer to fair value.
Effects on liabilities and equity
- A revaluation reserve is not a current liability. It is an equity reserve (or a balance‑sheet line) used to reflect valuation changes.
- Increases in the revaluation reserve normally increase equity (revaluation surplus). These gains are unrealized and generally cannot be distributed as dividends.
- Revaluation decreases either reverse existing revaluation surplus (reducing equity) or are recognized as an expense if no surplus exists.
Revaluation surplus
A revaluation surplus is the equity account that holds unrealized gains arising from revaluations of assets. Because these gains are unrealized, they are typically restricted from distribution as dividends.
Key takeaways
- Revaluation reserves record changes in the fair value of long‑term assets and keep carrying values current between scheduled depreciation adjustments.
- Increases usually credit a revaluation surplus in equity; decreases reverse surplus where possible and otherwise flow to profit or loss.
- Revaluation reserves are equity adjustments, not current liabilities, and unrealized gains in surplus are generally non‑distributable.