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Revaluation of fixed assets

Revaluation of fixed assets

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When fixed assets in a company are revalued, every year a transfer is made between revaluation reserve and profit & loss reserve of the difference between the historical cost depreciation and that on the revalued amount. The question is, assuming 2% depreciation, do you start the 50 year clock running again on the historical cost amount, using 2% of the WDV at the date of revaluation, or do you just carry on as before, with the effect that the historical cost asset will be written off years before the revalued one?

I ask because I have one where the revaluation gave a surplus over the historical WDV, but is les than the actual historical cost. Consequently, to compare the new depreciation with the old, using 2% on cost, will result in an increase in the revaluation reserve every year. But if I start the 50 year clock going again on the historical cost amount, writing off the WDV over 50 years, then the revaluation reserve will reduce each year, which feels more comfortable somehow.

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By Euan MacLennan
08th Sep 2014 17:51

We do it differently

We (advise the client to) decide on the expected life of the asset when it is acquired - (say) 50 years from 2000.  When the client (has taken our advice to) revalue, we write off the revaluation surplus over the remaining life of the original asset - (say) over 40 years from 2010 - so that the cost or value of the asset is fully depreciated to nil (or its residual value) in 2050, because it is clearly an absurdity that the original cost of an asset is written off 10 years before its revaluation surplus.

If and when we (encourage the client to) decide that the asset will still be economically useful up to 2075, we would reduce the rate of depreciation of both the cost and revaluation surplus so the asset would only be fully written off in 2075.

In other words, it is not tied to writing off balances at 2% or over 50 years - it is based on writing them off to a specific future date.

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By TerryD
09th Sep 2014 09:55

Thanks, Euan, that makes sense. I've tended to take the view that a valuation kind of assumes a further life of 50 years (no evidence for that of course). I shall (encourage my clients to) adopt a more flexible approach in future.

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