Revaluation of fixed assets journal entry
Overview
Revaluation of fixed assets is the measurement of the fair value of fixed assets by taking into account the change in fair value of the fixed assets which is usually done under the revaluation model of fixed assets at the end of the accounting period. Likewise, the company needs to make the revaluation of fixed assets journal entry to recognize and record the change in order to reflect the actual fair value of fixed assets on the balance sheet.
Under the revaluation model, an increase in the fair value of fixed assets is not recognized as a gain in the income statement. It is recognized and recorded as a reserve in the equity section of the balance sheet. This may be due to the fair value of the revalued fixed assets can go back down (e.g. due to impairment) during its useful life, in which the reversal of revaluation will be required to reverse back the reserved amount.
Revaluation of fixed assets journal entry
The company can make the revaluation of fixed assets journal entry by debiting the fixed asset account and crediting the revaluation surplus account.
| Account | Debit | Credit |
|---|---|---|
| Fixed asset item | 000 | |
| Revaluation surplus | 000 |
Revaluation surplus account is a reserve account in the equity section in which its normal balance is on the credit side. Likewise, in this journal entry of revaluation of fixed assets, both total assets and total equity on the balance sheet increase by the same amount.
Revaluation of fixed assets example
For example, on December 31, 2019, a building that has a carrying value of $162,000 on the balance sheet of the company ABC has been revalued to $180,000. This building has the remaining useful life of 9 years as of December 31, 2019.
In this case, the company ABC can make the revaluation of fixed assets journal entry by debiting an $18,000 increase ($180,000 -$162,000) into the building account of the fixed assets as below:
| Account | Debit | Credit |
|---|---|---|
| Building | 18,000 | |
| Revaluation surplus | 18,000 |
In this journal entry, both total assets and total equity on the balance sheet increase by $18,000 as of December 31, 2019.
Reversal of revaluation journal entry
Later, when the fair value of the revalued fixed asset goes back down (e.g. due to the impairment), the company needs to make the journal entry of the reversal of revaluation of fixed assets as below:
| Account | Debit | Credit |
|---|---|---|
| Revaluation surplus | 000 | |
| Fixed asset item | 000 |
As the reversal from the first journal entry above, both total assets and total equity decrease instead. However, this journal entry that has only two accounts (revaluation surplus and fixed asset account) is made only when the impairment loss of the fixed asset doesn’t exceed its revaluation surplus.
On the other hand, if the impairment loss exceeds the revaluation surplus, the company needs to include the impairment loss account for the excess amount as below:
| Account | Debit | Credit |
|---|---|---|
| Revaluation surplus | 000 | |
| Impairment loss | 000 | |
| Fixed asset item | 000 | |
| Accumulated impairment loss | 000 |
In this journal entry, the total assets on the balance sheet decrease more while there is also an increase of total expenses on the income statement.
Reversal of revaluation example
For example, later, due to a sudden drop of market value, the building in the example above has been revalued to $140,000 as of December 31, 2020. At this point in time, the carrying value of the building is $160,000 (revalued of $180,000 in the example above – $180,000/9 years).
In this case, the company ABC can make the journal entry for the reversal of revaluation of the building of fixed assets that drops back down to $140,00 on December 31, 2020, as below:
| Account | Debit | Credit |
|---|---|---|
| Revaluation surplus | 18,000 | |
| Impairment loss | 2,000 | |
| Building | 18,000 | |
| Accumulated impairment loss | 2,000 |
The decrease in the fair value in this case is $20,000 ($160,000 – $140,000) and as the balance of revaluation surplus is only $18,000 (in above example), the excess amount of $2,000 ($20,000 – $18,000) will go to the impairment loss account.
Likewise, in this journal entry, total assets on the balance sheet decrease by $20,000 and total equity decrease by $18,000 while the total expenses on the income statement increase by $2,000 as of December 31, 2020.
It is useful to note that while the revaluation model of fixed assets is allowed under IFRS, such model is prohibited under US GAAP. In other words, only the cost model is allowed under US GAAP. Hence, the value of the fixed assets may go down (e.g. due to impairment) but it will not go up under US GAAP.