What Is Remeasurement?
Remeasurement is the re-evaluation of the value of a physical asset or foreign currency on a company's financial statements. Remeasurement is the process of reestablishing the value of an item or asset to provide a more accurate financial record of its value. Remeasurement is important because it can help companies revalue fixed assets–or physical, long-term assets– such as land. Companies also use remeasurement when translating the value of revenues and assets from a foreign subsidiary that's denominated in another currency.
- Remeasurement is the re-evaluation of the value of a physical asset or foreign currency on a company's financial statements.
- Remeasurement is the process of reestablishing the value of an item or asset to provide a more accurate financial record of its value.
- Companies also use remeasurement when translating the financial statements of a foreign subsidiary that's denominated in another currency.
Remeasurement is employed during a situation when the value of a physical, long-term asset has changed, such as land. A company holds the value of the land it owns on the balance sheet. If the value of the land changes significantly, it may no longer be reflected accurately on the balance sheet. As a result, the change in value could lead to an inaccurate valuation of the company. Remeasuring the asset allows the company to more accurately record the value of the asset and may allow a deductible loss to be taken.
The accounting process of remeasurement occurs within a company's long-term assets section of the balance sheet. Land, for example, often appreciates with time, and a company must account for the appreciation as an adjusting entry under an account named "modified historical cost," or "mixed measurement system."
Remeasurement is also common when companies have a foreign subsidiary. If the functional currency of the subsidiary is not equal to the local currency of the subsidiary, the parent company must use remeasurement to evaluate the effect of foreign currency translation on the parent company. It is also used in cases where the subsidiary is operating in an environment where there is hyperinflation or large and frequent swings in the currency exchange rate. Hyperinflation is when a country is experiencing rapid and excessive increases in the prices of goods. Remeasurement, in this context, is also known as the temporal method, which uses historical exchange rates based on when the assets were acquired.
Foreign currency remeasurement would come into play for a company that has a subsidiary in the United Kingdom, for example, where the local currency is the British pound. However, the company sells to Europe and is paid in euros, which would be the functional currency. The parent company would eventually need to convert the financial statements back to the parent company's local currency.
When dealing with currency translation and a foreign subsidiary, gains or losses from foreign currency translation are recorded in the "current income" portion of the income statement. As a result, remeasurement can impact the profitability of a business.