Understanding Revaluation Reserve and How It Is Recorded

What Is Revaluation Reserve?

Revaluation reserve is an accounting term used when a company creates a line item on its balance sheet for the purpose of maintaining a reserve account tied to certain assets. This line item can be used when a revaluation assessment finds that the carrying value of the asset has changed.

Understanding Revaluation Reserve

Companies have the flexibility to create line items for reserves on the balance sheet when they feel it is necessary for proper accounting presentation. Companies may use reserves for various reasons, including asset revaluation. Like most reserve line items, the revaluation reserve amount either increases or decreases the total value of balance sheet assets.

Revaluation reserves are not necessarily common, but they can be used when a company believes the value of certain assets will fluctuate beyond established schedules. The standard procedure for identifying the carrying value of assets on the balance sheet involves marking assets down overtime on a scheduled basis, usually based on a depreciation schedule.

In general, revaluation reserves increase or decrease the carrying value of the asset-based on estimates of its fair value.

Companies may establish a revaluation reserve if they believe an asset’s carrying value needs to be more closely monitored and assessed due to certain market situations, such as real estate assets that are increasing in market value or foreign assets that are fluctuating due to currency changes. A company can add to or subtract from the revaluation reserve throughout the year without waiting for monthly or quarterly scheduled adjustments. This line item helps to keep value more accurate through day-to-day activities.

Companies may use reserve lines in place of or in association with write-downs or impairments. Write-downs and impairments are usually a one-time expense charge due to an unexpected decrease in the value of a long-term asset.

Recording Revaluation Reserves

The revaluation reserve refers to the specific line item adjustment required when the revaluation of an asset takes place. In most cases, the reserve line either increases a liability or reduces the value of an asset. When an entry to a reserve account is made, an offsetting entry must be made to an expense account which will show up on the income statement.

If the asset decreases in value, the revaluation reserve is credited on the balance sheet to decrease the carrying value of the asset, and the expense is debited to increase total revaluation expense. If the asset increases in value, the offsetting reserve expense would be decreased through credit, and the revaluation reserve on the balance sheet would be increased through a debit.

Book Value vs. Fair Value

For most companies, the carrying value of assets is the book value after netting out any accumulated depreciation. The carrying value of an asset may be adjusted to the fair value after the depreciation period has ended. Generally, the decision to record an asset's carrying value at book value rather than fair value is made when an asset is long-term in nature. Shorter-term assets are usually more liquid and therefore can easily be carried on the balance sheet at their fair market value.