Following are the important terms to know before studying the topic further:
How Do Accountants Revalue Assets? Accountants define asset revaluation as the process of changing asset book values upwards or downwards, so as to report values more more realistically. Revaluation is the company's formal announcement that earlier asset values and metrics are no longer accurate or realistic. Initial Asset Book Value Assets receive initial book value carrying value when firms acquire them. Over time, of course, an asset's real value to the company can rise, as with appreciation, or fall as with impairment.
Asset value might then be represented more realistically by: The asset's current market value. Its current replacement cost. New estimates for useful life or residual value. Its expected contribution to future earnings. The judgment of a professional appraiser. When it is Time to Revalue Assets In any case, there may arise a substantial difference between asset value by these measures, on the one hand, and asset book value on the other hand. The discrepancy puts the company'sBalance sheet at odds with an important and universally recognized accounting imperative: Asset values that are unrealistically high or low can produce a picture of earnings and financial position that can mislead owners, investors, and company decision makers.
Financial reports with values that are not verifiable or not objective will score poorly on credibility and trust with auditors , regulators, and investors. In pursuit of realistic, verifiable, and objective reporting, therefore, accountants sometimes choose to revalue assets. The purpose of asset revaluation is to present: More accurate financial metrics, such as return on assets, return on equity, or return on capital employed. A basis for conserving funds to replace certain fixed assets when they reach the end of their economic lives or service lives.
When a company uses a "Provision for depreciation" account, and when assets appreciate substantially, provisions based on historical cost figures may be unrealistically low. A more accurate fair market value for assets that substantially appreciate after purchase. Asset categories most likely to appreciate substantially in this way include artistic assets e.
Exercising Leeway in Revaluing Additionally, a company may exercise available leeway in accounting standards so as to "shape" or "position' itself with owners, potential investors, potential business partners, or potential lenders. The company may revalue assets, as allowed, to: Decrease the company's debt to equity ratio leverage. Facilitate the sale of assets. Increase the possible borrowing ceiling possible with lenders.
Improve the terms for internal or external reconstruction. Improve the company's negotiating position before merger or acquisition by another company. Depreciation is a prescribed, planned, and standardized process for reducing book value of certain tangible assets, year by year, across their depreciable lives. The result is lower reported income and a tax savings for owners for more on this subject, see the article Depreciation. Depreciation expense normally takes the asset book value from it's initial value, down to a residual value salvage value , or down to 0.
A similar process called amortization applies to the values of so-called definite intangible assets, that is, intangible assets that have a limited life, such as the purchased right to use a patent for a specific time period see the article Amortization. Amortization and depreciation in the accounting sense change the book value of assets, but they are not considered revaluation.
Depreciation and amortization expenses are based on the idea that these assets have a limited useful life, during which their value is "used up" or "depleted. When this occurs, depreciation or amortization continues, using the remainder of the depreciable life to bring the new book value down to the new residual value see Revaluation example 3, below, for an illustrated instance.
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How Do Accountants Revalue Assets? Accountants define asset revaluation as the process of changing asset book values upwards or downwards, so as to report values more more realistically.