I agree with Mr. Rupesh, Revaluation Reserve will be created for Rs. 2000 only
This has reference to the Calculation of Depreciation whether on the revalued amount of fixed asset or on the WDV of the Fixed Asset. Section 205 and 350 of the Companies Act does not silent about the calculation of Depreciation whether on revalued amount or on the WDV of the Fixed asset.
AS PER ACCOUNTING STANDARD 6
Para“26”Where the Depreciable asset are revalued, the provision for depreciation should be based on the revalued amount and on the estimate of the remaining useful lives of such assets. In case the revaluation has a material effect on the amount of depreciation, the same should be disclosed separately in the year in which revaluation is carried out.”
AS PER INDIAN GAAP.
It is significant to note that the Indian GAAP permits revaluation of fixed assets even if results in an upward revision of the valuation. Any increase in the valuation should be credited to revaluation reserve. The additional depreciation relatable to revaluate should be adjusted against revaluation reserve.
AS PER ICAI GUIDANCE NOTED ON TREATMENT OF RESERVE CREATED ON REVALUATION OF FIXED ASSETS
Depreciation is required to be provided with reference to the total value of Fixed Assets as appearing in the accounting after revaluation. However for certain statutory purposes, e.g. dividends, managerial remuneration etc. depreciation is relatable to historical cost.
Taking transfer from Revaluation Reserve to cover extra depreciation arising out of revaluation of fixed assets is allowed. However, it is prudent not to take such transfer.
UTILISATION OF REVALUATION RESERVE TO NULLIFY THE IMPACT OF EXTRA DEPRICIATION ON REVALAUED ASSET
Revaluation reserve can be used to nullify the effect of additional depreciation arising out of revaluation of fixed assets. AS 6 in para 26 states that "where the depreciable assets are revalued, the provision for depreciation should be based on the revalued amount and on the estimate of the remaining useful lives of such assets". Thus, there is an additional depreciation charge on account of revaluation. The issue here is whether this additional depreciation can be charged against revaluation reserve.
AS 10 and AS 6 are silent on the treatment of such additional depreciation. However, the ICAI has issued a Guidance Note on Treatment of Reserve created on Revaluation of Fixed Assets. Para 12 of this Guidance Note suggests that "it will be prudent not to charge additional depreciation against revaluation reserve". However, in other paras, the Guidance Note allows utilizing revaluation reserve to nullify the effect of additional depreciation. It is further suggested that company will have to provide for full depreciation in the profit and loss account and thereafter it can take transfer from revaluation reserve to adjust additional depreciation. Mostly, companies do not opt for the more prudent policy of not adjusting additional depreciation.
Depreciation is charged on the value of revalued asset and the difference of the asset arises out of revaluation of asset is debited to revaluation reserve only .The extra depreciation charged on revalued asset is not burden on profit and loss account in-fact revaluation of assets does not mean realized profit it is merely a notional entry therefore enhanced depreciation on the enhanced value of the asset should not affect the profit and loss account and enhanced depreciation on accounts of depreciation should be adjusted out of revaluation reserve
There may be two method of transferring the amount of additional Depreciation on Fixed asset on revaluation Reserve:
1) DIRECTLY TRANSFERRING THE AMOUNT OF EXTRA DEPRECIATION ON REVALUED ASSET TO REVALUATION RESERVE
i) Depreciation A/c ….. Dr.
To Fixed asset A/c
(with total amount of Depreciation including the extra
amount on the revalued value of fixed asset)
ii) Revaluation Reserve A/c ….Dr.
To Depreciation A/c
(Transferring the amount of Extra amount of Depreciation to
Revaluation Reserve Account)
iii) Profit and Loss A/c ….. Dr.
To Depreciation A/c
( transferring only the amount of Depreciation
as per WDV to Profit and loss A/c)
2) AS PER THE ICAI GUIDELINES, THE PRUDENT METHOD IS TO FIRST TRANSFER THE WHOLE AMOUNT OF DEPRECIATION TO PROFIT AND LOSS ACCOUNT THAN TRANSFERRING THE EXTRA AMOUNT OF DEPRECIATION TO REVALUATION RESERVE.
i) Depreciation A/c ….. Dr.
To Fixed asset
(with Total amount of Depreciation including the extra
amount on the revalued value of fixed asset)
ii) Profit and Loss A/c ….Dr.
To Depreciation A/c
( With whole amount of Depreciation Including
the amount of extra Depreciation on Revaluation of Fixed asset)
iii) Revaluation Reserve A/c …. Dr.
To Profit and Loss A/c
( With the amount of Extra Depreciation on the revalued Fixed asset)
Depreciation will be charged on Revalued value of Fixed asset and the extra amount of depreciation will be transferred to Revaluation Reserve. It will have no impact on the amount of Profit of the company. Only the Depreciation on WDV will charged from the Profit and Loss A/c of the Company
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