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Revaluation is the process by which the costs of assets are restated in terms of current worth. There are a number of theories of revaluation, none of them comprehensive. Two of the more prominent theories are known as constant currency accounting and current cost accounting. Regardless of the theory employed, the basic concept behind revaluation is that of comparability. The essential question is whether, over time, you can make a meaningful comparison between financial statements when such factors as the rate of inflation and the current cost of assets are considered.
Under constant currency accounting, also known as constant purchasing power accounting, the effect of inflation is the major factor taken into consideration. Inflation trends upward, though it can vary widely from country to country, from virtually insignificant, single-digit rises to three- and even four-digit rates. Comparing costs from one year to the next in a hyperinflationary economy is meaningless unless the currency fluctuation is factored in. In some countries, you are required to adjust costs as the value of the currency changes. Even without a government mandate, you might want to revalue assets for reporting purposes.
The current cost accounting model relies primarily on the assumption that, apart from any currency changes, the price of assets can change significantly compared to the general price level. Further, that price can go up or down. Within this model, a topic of particular concern is the cost of replacing assets. One of the questions that this brings up is whether a company has sufficient insurance coverage to replace a given asset with one that is comparable.
For example, a manufacturing facility that was purchased several years ago for 1,000,000.00 could most likely not be replaced for that same 1,000,000.00 today if it burned down. While inflation might account for some of the difference, it is possible that the current cost of building supplies and labor has risen beyond the rate of inflation. Conversely, if a personal computer, originally purchased three years ago for 4,000, is stolen, it is quite possible that a comparable replacement can be found for less than that original cost, because the cost of computer-related equipment has been decreasing. If a company revalues its assets for insurance purposes, it can ensure adequate coverage when such dramatic losses occur.
The revaluation of large numbers of assets is most often accomplished through the use of indices. These indices are obtained from sources external to the company, whether from governments or other organizations. The indices can be used as multipliers or divisors. They can be expressions of change over periods as short as a single day or as long as several years. The indices can be applied to only current year balances or to prior year balances as well. The application of these indices to the proper selection of assets to revalue through a method of calculation can yield significant results, whether your aim is to revalue for insurance purposes, to meet government reporting requirements, or to report to management for future planning.
A revaluation index is simply a value that has been determined by an agency, governmental or private firm outside your company, which reflects a change in cost that can be applied to your assets. The change may relate to currency fluctuations or the price of certain kinds of assets in the marketplace or some combination of factors. Depending on your approach to revaluation, or government regulations concerning revaluation, you may need only a single index or you may need several tables of indices. These are entered into the system manually and then are applied to your assets in the manner that you select.
There are two revaluation calculation methods you can choose when you run your revaluation. The two methods are:
Revaluation Year Balances
Inception-to-Date
While both methods revalue both your cost and your accumulated depreciation amounts, it is the way that the posted balances are handled that differentiates them.
When you select Revaluation Year Balances, the system revalues the current year-to-date balance separately and then the beginning balance.
For example, the current year-to-date amounts for both primary and secondary accumulated depreciation are revalued and the adjustment amount is calculated. Then the beginning balances in both the depreciation accounts are revalued and their adjustment amounts are calculated. Then the adjustments for both the year-to-date and the beginning balances are added together and one journal entry is created for the account you have specified in the processing options. An offsetting journal entry is also created for posting to the cost offset account you set up in the FR AAIs. If you need to track both current adjustments and prior year adjustments, you must set up offset accounts for both the FR2 (current year accumulated depreciation) and FR3 (prior year accumulated depreciation) AAIs. Offsetting journal entries are then created automatically for these two offset accounts.
Revaluation for the asset cost is treated similarly except that there is only a single offset.
When you select the Inception-to-Date calculation method, account balances for every year are revalued. For example, year-to-date activity in the asset cost account is revalued for each year and the adjustment amount is calculated for each year. The adjustment amounts are then summed and a journal entry is created for that amount, to be posted to the account specified in the processing options. The offsetting entry is created for posting to the cost offset account you set up in the FR AAIs. Both primary and secondary accumulated depreciation are treated similarly except for the offsets. If you need to track both current adjustments and prior year adjustments, you must set up offset accounts for both the FR2 (current year accumulated depreciation) and FR3 (prior year accumulated depreciation) AAIs. Offsetting journal entries are created automatically for these two offset accounts.
For either of the two revaluation methods, you can specify whether to use the values entered in your index tables as true indices or as factors. The two approaches yield very different results and the values in your index tables would likely be quite different depending on the approach taken or mandated. For example, assume that an asset purchased in June 2018 at a cost of 25,000 must be revalued in June of 2019. Use the following index table:
| Date | Index |
|---|---|
| June 2018 | 137.251 |
| July 2018 | 140.049 |
| August 2018 | 142.370 |
| September 2018 | 145.317 |
| October 2018 | 145.307 |
| November 2018 | 151.964 |
| December 2018 | 156.915 |
| January 2019 | 162.556 |
| February 2019 | 166.350 |
| March 2019 | 170.012 |
| April 2019 | 174.012 |
| May 2019 | 178.032 |
| June 2019 | 180.931 |
In index revaluation, the values for June 2018 and June 2019 are combined into a fraction, using June 2018 as the denominator. This fraction is then multiplied by the original cost of the asset. The equation would look like the following:
Cost * (June 2019 value/June 2018 value) = Revalued cost
or
25,000 * (180.931/137.251) = 32,956.23
In factor revaluation, the values in the index table become simple multipliers. The table is viewed somewhat differently, though. The values in the table would be considered valid as of June 2019 and the revaluation factor is then derived from the acquisition date. This number is then multiplied by the original cost. The equation would look like the following:
Cost * June 2018 value = Revalued cost
or
25,000 * 137.251 = 3,431,275.00