This chapter contains the following topics:
Note:Country-specific functionality for revaluing assets exists for Chile, Colombia, and Peru.
This section discusses:
Revaluation calculation methods.
Revaluation by index of factor.
After you set up revaluation codes and revaluation indexes, you can calculate asset revaluation.
Revaluation is the process by which the costs of assets are restated in terms of current worth. The basic concept behind revaluation is that of comparability. The 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.
A number of theories of revaluation exist. Two of the more prominent theories are:
Constant currency accounting
Current cost accounting
Under constant currency accounting, the effect of inflation is the major factor taken into consideration for asset revaluation. Inflation trends move 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. Within this model, the cost of replacing assets is of particular concern. One of the questions that this method 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 purchased several years ago for 1,000,000 USD could most likely not be replaced for that same 1,000,000 USD today if it burned down. While inflation might account for some of the difference, the current cost of building supplies and labor might have risen beyond the rate of inflation. Conversely, if a personal computer, originally purchased three years ago for 4,000 USD is stolen, 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 indexes. These indexes are obtained from sources that are external to the company, whether from governments or other organizations. They can be expressions of change over periods as short as a single day or as long as several years. The indexes can be applied to only current year balances or to prior year balances. The application of these indexes 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 a value that has been determined by an agency outside the company, governmental or private, that reflects a change in cost that can be applied to the assets. The change might 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 might need only a single index; or you might need several tables of indexes. These indexes are entered into the system manually and then applied to the assets in the method that you select.
The two revaluation calculation methods that you can select when you run the revaluation are:
Revaluation Year Balances
While both methods revalue both the cost and the accumulated depreciation amounts, the way that the posted balances are handled differentiates them.
When you select Revaluation Year Balances, the system revalues the current year-to-date balance separately and then revalues the beginning balance. Unless you specify otherwise, the system updates the cost, primary accumulated depreciation, and secondary accumulated depreciation accounts. In an example of the revaluation process for year balances, the system:
Revalues the current year-to-date amounts for both primary and secondary accumulated depreciation, and calculates the adjustment amount.
Revalues the beginning balances in both the depreciation accounts and calculates their adjustment amounts.
Adds together the adjustments for both the year-to-date and the beginning balances, and creates one journal entry for the ledger that you have specified in the processing options.
Creates offsetting journal entries for posting to the current year offset account (to offset the year-to-date balance adjustment) and prior year offset account (to offset the beginning balance adjustment) that you set up in the FR AAIs.
Revaluation for the asset cost is treated similarly, except that only a single offset exists.
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 post to the ledger that is specified in the processing options. The offsetting entry is created for posting to the cost offset account that 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 revaluation methods, you can specify whether to use the values entered in the index tables as true indexes or as factors. The two approaches yield different results, and the values in the index tables would probably be different, depending on the approach that is taken or mandated. For example, assume that an asset purchased in June 1999 at a cost of 25,000 USD must be revalued in June of 2000. Use this index table:
In index revaluation, the values for June 1999 and June 2000 are combined into a fraction, using June 1999 as the denominator. This fraction is then multiplied by the original cost of the asset. The equation would look like:
Cost Ã (June 2000 value/June 1999 value) = Revalued cost
Here is an example calculation:
25,000 Ã (180.931/137.251) = 32,956.23
In factor revaluation, the values in the index table become simple multipliers. The values in the table would be considered valid as of June 2000, and the revaluation factor is then derived from the acquisition date. This number is then multiplied by the original cost. Here is an example equation:
Cost Ã June 2000 value = Revalued cost
Here is an example calculation:
25,000 x 180.931 = 4,523,275.00 x 1 percent = 45,232.75
This section lists a prerequisite and discusses how to:
Run the Revaluation Journal (R12845).
Set processing options for the Revaluation Journal (R12845).
Set up revaluation indexes.
You use the Revaluation Journal program (R12845) to revalue the assets. The program can be run in preliminary mode to view the projected revaluation amounts or in final mode to update the F1201 table, the F1202 table, and the F0911 table with these amounts. Unless you specify otherwise, the system updates the cost, primary accumulated depreciation, and secondary accumulated depreciation accounts. You determine which assets or asset groups to revalue through data selection. Set processing options to specify the from and to ledger types, subledgers, and subledger types.
To create an unrecognized gain or loss, you can designate a subledger to post the revaluation adjustment. With this method, you can preserve the historical cost while continuing to revalue the assets.
To calculate an inception to date revaluation, F1202 records must exist for every year of the life of every asset that is included in the revaluation.
To revalue assets by set amounts or allocations, you must either manually create journal entries or use a report writer to create them.
The Revaluation Journal prints assets by company. If you revalue large numbers of assets, the report can be long. You can maintain the report as a spool file unless you are required to print a report.
Use processing options to limit the effect of revaluation to updating either or both the Last Year Cost and the Replacement Cost fields in F1201.
Select Asset Revaluation (G1234), Revaluation Journal.
Set these processing options before you run the Revaluation Journal.
Use these processing options to specify how to run the report.
Note:If no source or destination selections are used, the asset is adjusted to the same ledger type, subledger, and subledger type.
Specify whether to run the program in preliminary or final mode. Values are:
Blank: Preliminary mode.
1: Final mode.
Specify the journal entry date.
Specify the From ledger type. If you leave this processing option blank, the system uses the default ledger type, AA.
Specify the From subledger. Leave this processing option blank to specify all subledgers.
Specify the From subledger type. Leave this processing option blank to specify all subledger types.
Specify the To ledger type. Leave this processing option blank to specify the ledger type from the revaluation source.
Specify the To subledger. If you leave this processing option blank, the system uses the subledger specified in the Revaluation Source field.
Note:If you use the To Subledger, you must also use the To Subledger Type.
Specify the To subledger type. If you leave this processing blank, the system uses the subledger type specified in the Revaluation Source field.
Note:If you use the To Subledger, you must also use the To Subledger Type.
Enter the method of calculation. Values are:
1: Balances of Revaluation Year. This is the default.
2: Inception-to-Date. Inception-to-date is calculated as: period amounts from all selected years applied to Index/Factor in effect at End of Each year, summed to derive current year.
Specify the revaluation code from UDC 12/RI.
Specify the Revaluation As Of Date. If you leave this processing option blank, the system uses the GL date.
Specify the Effective Date to use. Values are:
1: Date Acquired. This is the default.
2: Depreciation Start Date.
3: Revaluation Date.
Specify the multiplier to be used in calculation of revaluation. Values are:
1: Index formula. This is calculated as follows: (index as of revaluation date / index as of effective date). This is the default.
Specify whether the system replaces the last year cost from the asset master. Values are:
Blank: Do not replace the last year cost.
1: Replace the last year cost with the current year replacement cost.
Specify whether the system replaces the current year replacement cost from the asset master. Values are:
Blank: Do not replace the current year replacement cost.
1: Replace the current year replacement cost with the revaluation amount.
Indicate whether you want to use flex accounting. Values are:
Blank: Do not use flex accounting.
1: Use flex accounting.
Use these processing options to specify how the report will print.
Specify whether to suppress printing of audit information. Values are:
Blank: Print file changes and calculations.
1: Print only file changes.
Specify whether the system inserts a page break at each asset number. Values are:
Blank: Insert a page break.
1: Do not insert a page break.
Use this processing option to specify the version to use.
Specify the G/L Post version (R09801) to be executed automatically. This option is valid only if you are processing in final mode.
This section discusses how to review journal information.
Asset Revaluation (G1234), Revaluation Journal Review.
When you run the Revaluation Journal program in final mode, the system automatically posts journal entries to the general ledger if you enter the version in a processing option. If a journal entry did not post, you can use the Revaluation Journal Review program to review and revise the journal entry, review and revise the batch information, and approve the batch of journal entries for posting to the general ledger.