Revaluation reserve is the equity item that increases in contrast with long-term assets account on the balance sheet due to fluctuation of market value. Assets’ book value needs to increase when market value increase. At the same time, we need to credit revaluation reserve while debit assets balance. On the other hand, when assets’ market value decreases, we will debit revaluation reserve and credit assets.
Revaluation reserve can be used for both fixed asset revaluation and foreign exchange gain/loss. Foreign exchange gain/loss incurred due to the increase or decrease of company assets or liability raise from foreign currency fluctuates. For example, we sell products overseas and record the accounts receivable. However, when the customer settles the accounts receivable, we receive more cash than our recorded balance due to the exchange rate. The home currency increase value after conversion from the customer’s currency.
Gain/Loss on the exchange rate will record in the income statement as other comprehensive income sections. The other side will be recorded as revaluation reserve which will be net off in the future loss.
Revaluation Reserve Formula
|Revaluation Reserve = Assets Market Value – Assets Carry Amount|
Revaluation Reserve Journal Entries
These are the journal entries related to revaluation reserve due to long-term asset revalue.
- When long term assets’ market value higher than the carrying amount, we have to record the following:
- When long term assets’ market value lower than the carrying amount, we need to record the following:
Revaluation Reserve Example
Based on ABC’s financial statements, the investment property $ 20 million is recorded on the balance sheet. The company has evaluated the market price of the same investment property. The market value is estimated to be about $ 25 million.
|Fixed Assets||$ 5 million|
|Revaluation Reserve||$ 5 million|
- One year later, the market value of the same property decrease to $ 22 million, we should record the following:
|Revaluation Reserve||$ 3 million|
|Fixed Assets||$ 3 million|
Negative Revaluation Reserve
Based on the above example, the revaluation reserve will be decreased whenever the market value less than the carrying amount on the balance sheet. The difference will be deducted from the revaluation reserve in the equity section. However, at some point, the revaluation reserve will decrease to zero or even negative if the market value keeps decreasing. Based on the accounting standard, we do not record negative revaluation. If the asset market value decreases more than the available reserve, it will record as an impairment expense.
Base on the above example, on 202X, investment property’s market price decrease the value to $ 17 million. The carrying amount is $ 22 million, so we need to reduce the value of the assets to $ 5 million. The revaluation reserve balance has only $ 2 million, so need to record $ 3 million to impairment expense:
|Revaluation Reserve||$ 2 million|
|Impairment Expense||$ 3 million|
|Fixed Assets||$ 5 million|