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ASSET REVALUATION

(Guest)

Suppose land is revalued upwards from a book value of Rs 2 crores to Rs 4 crores. so there is an increase in assets by 2 crores. but why is it that there will be an equal increase in equity as well? also, shouldn't this asset appreciation have an effect on the income statement as well (greater depreciation, for instance)

one more question... what is an arm's length transaction (please explain in simple terms)

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4 Replies

(Guest)

Revalued amout will be credited to revaluation reserve.. and depreciation will be applicable on the new amount

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(Guest)

arms length transaction means where any infuencing relation between parties does not exist.

M.Sriram Shenoy (CA Final) (814 Points)
Replied 15 February 2008

When assets are revalued, the value of respective assets go up resulting in a notional or non monetary gain.

To give effect to this, we

DEBIT Asset account
CREDIT Revaluation Reserve account
(To the extent of increase in value)

Revaluation Reserve account is not a free reserve till the life time or discardation of the asset , whose revaluation portion lies in this account.

As far as depreciation is concerned,
In the books - depreciation will be provided on the revalued amount.

But Income Tax dept will not consider revaluation gain and depreciation on the revalued amount(ONLY on the revalued amount and not full amount) debited to P&L account will be disallowed.

And by the way, as per your question, land value will never depreciate, except in case of special circumstances.

ravi sankar (Chartered Accountant) (157 Points)
Replied 15 February 2008

Even in IT the depreciation can be only upto the cost of the assest for which it was purchased or altered. Depreciation on revalued portion of the asset value cannot be claimed in IT. Only for the books to show the current value of a particular asset one can revalue. But again all the accounting standards for the same applicable for giving proper notes on the accounting statement/