Asset revaluation is a revaluation of a company’s fixed assets as a result of an increase in asset value in the market. Or also because of the low value of fixed assets in the financial statements due to evaluation.
It is this increase or decrease in asset value that causes the value of fixed assets in the financial statements to become unnatural. So the purpose of this asset revaluation is so that the company can carry out a more reasonable calculation of income and expenses.
By making adjustments to these assets, you will be able to find out the true capabilities and value of the company. It doesn’t matter the size or type of business you have.
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Assets will remain one of the important components for the business. Where this serves as a provider of products or services that you sell, for more details about this revaluation, here is the explanation.
Definition of Revaluation
Revaluation is an adjustment made so that the value of an asset remains in accordance with the fair value or a current market value.
When you buy a fixed asset for the first time. The recording of the value of these fixed assets will always be in accordance with the price of acquisition. However, the value of these assets when viewed from the market value will always change from time to time.
With a revaluation, the value of your fixed assets will be updated according to the current market value of the related fixed assets.
In this case, later the Manager only needs to decide whether the value of the fixed assets will be listed in accordance with the results of the revaluation. Or even fixed at the Historical Cost in accordance with the initial acquisition price.
The Revaluation Model will allow the value of these fixed assets to increase or decrease. However, when viewed from the perspective of the cost model, revaluation is only possible when the fixed asset value decreases, which will then be included in the adjustment in the impairment losses account.
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Functions of Asset Revaluation
This revaluation is quite important, because it will be able to help your business in several ways. The following is a function of asset revaluation:
- Asset Revaluation for the function of preparing for the sale of fixed assets to other parties.
- The function of Asset Revaluation is to negotiate the fair value of fixed assets before your company begins to be acquired or merged by another company.
- Asset Revaluation will Show an update of the market value of fixed assets which has increased since its initial purchase.
- Asset revaluation can ensure the company has sufficient funds to be able to replace fixed assets at the end of their economic life.
Benefits of Asset Revaluation
This asset revaluation has many benefits for the company, these benefits are:
1. Demonstrate a position of reasonable wealth
As previously mentioned, the purpose of asset revaluation is to provide real value to a company’s assets. Thus, the value of fixed assets in a financial report will be able to reflect fair value.
Asset revaluation will also be very useful for a company that goes public. This is of course because it can be used to compile a value of an asset to a relatively more realistic price.
2. To Control Capital
Asset revaluation can reduce a company’s debt to equity ratio . So, if the company you own will borrow debt from a bank, the bank will be able to provide it easily.
And this is of course because if the amount of capital increases, then the capital adequacy ratio will also increase. That way, the bank will be able to provide a capital loan to your company and other customers.
In this case, it means that the bank will also get a benefit from the profits obtained by a company. Therefore, asset revaluation is said to be able to control capital.
3. To attract investors
Another benefit of asset revaluation is to improve the company’s financial performance. That way, this can certainly be used to attract investors. You can also start by issuing bonds or offering company shares.
Through a calculation of the debt to assets ratio and also the debt to equity ratio of the company.
So creditors can also give their trust to invest in your company. This will clearly provide benefits from the revaluation of these assets.
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4. Revaluation will be able to reduce tax obligations
The benefit of the next revaluation is that it can reduce tax obligations. As time goes by, the value of the company’s assets, which was previously low, will of course begin to increase.
At the same time, if the value of the asset increases, this will also affect the cost of depreciation. This depreciation expense will also increase, and this will also have an impact on financial reports.
The profits generated by this company will decrease, so that the liability from taxes in that year will certainly be reduced. This is clearly a benefit of a good revaluation.
5. Revaluation provides benefits for companies that will carry out a Merger
Asset revaluation can help a company that wants to or even will do a merger. The reason is because a company that will or wants to do this merger must first re-evaluate every fixed asset it owns. So that the value of the real assets or the fair value of this company will only be known.
In addition to the benefits that you already know from asset revaluation above. You also need to know that asset revaluation is also an activity that is quite difficult to do. The costs incurred to carry out the revaluation are also quite large because you have to pay for the services of an appraiser.
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Regulations Relating to Asset Revaluation
As previously explained, asset revaluation is a very important thing. Because of this, the government even regulates the revaluation of these assets through an official regulation. Regulations related to asset revaluation are regulated in the law in article 19 paragraph 1, Law No. 36 of 2008.
In the regulation, it is said that the Minister of Finance will have the authority to stipulate a regulation related to asset revaluation and also the factor of adjustment or revaluation, if there is a discrepancy between the elements of existing costs and income due to price developments.
What Price Adjustments Can Do
Not all assets in a company can be revalued. An asset that can be revalued is a tangible fixed asset. Where these assets are located in Indonesia, and are owned and also used to be able to obtain, collect, and also maintain an income which is a tax object. An example of an asset that can be revalued is such as a property building.
The building is one of the tangible fixed assets and also the position of course is clear in which area it was built. If a revaluation is to be carried out, it can be carried out based on the fair value or market value of the building property.
Companies that can carry out this value adjustment process are domestic corporate taxpayers and a permanent establishment, except for companies that do hold licenses to carry out bookkeeping in English as well as foreign currencies.
As for assets that can be revalued, they are as explained, namely those located in Indonesia and also have a beneficial value. This value is mainly in obtaining, collecting, and maintaining income which is a tax object.
If you want to make an adjustment in the value of assets, the company must submit an application to the Director General of Taxes or the DGT who is authorized to issue a decree on adjusting the value of fixed assets from the company based on the application.
It should be known that if the adjusted value of an asset is obtained by a difference in excess of an asset’s value, then there will be an income tax or final income tax of 10% that must be paid in that year. Meanwhile, if there is a decrease in asset value, then there will be no deferred tax debt that can be reversed in the following year.
This means, if the company makes an annual adjustment and the value of these revalued assets continues to increase, there will be an annual income tax payer obligation of 10%.
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Recording for Asset Adjustments
Recording for asset revaluation or adjustment also needs attention. When the results of the ink revaluation show a positive number, where the value on the asset book will continue to appreciate as a result of adjustments to market values.
The increase in value will not be recorded in a profit and loss statement or what is called an Income Statement. In this increase, of course, it must be credited in a special account in the equity statement.
The name of the special account is Revaluation Surplus. Where in this account everything will be contained regarding the increase in each fixed asset value caused by a revaluation. Until finally the fixed assets will be sold, donated, or even disposed of. But on the contrary, if there is an impairment or impairment.
So, the decrease must be debited in the Revaluation Surplus account. If the decrease or loss of the assets owned exceeds the surplus value, then it means that it must be recorded in an impairment loss account.
The value of this revalued fixed asset will then become a new base value for depreciation. This depreciation is also still being carried out on a fixed asset with a new book value, in the remaining economic life of an asset.
Revaluation Method
There are several methods for adjusting or revaluing the value of fixed assets with fair market value, namely:
1. Indexing method
In this method, an index applies to the cost of an asset to determine its current cost. The statistics department is the most exciting in issuing index lists.
2. Methods for current market costs
To be able to get a fair market value of land and buildings, you can ask for help from several property dealers or also the value of real estate available on the market.
Meanwhile, to get a fair market value of the machine, you can ask for the help of a supplier. For that matter, a property agent can also use soap for the real estate system, so that this will also enable them to optimize data about existing properties.
3. Assessment Method
These technical appraisers, they carry out a detailed appraisal of an asset to be able to find out its market value. A complete assessment of course the company will try to do, this is possible because the owner will need it when taking out an insurance policy for fixed assets.
Don’t let the value of the fixed assets be too high or too low. Several factors affect the fair market value of an asset, such as date of purchase, age, type, repair and maintenance policies, and availability of spare parts.
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The Advantages and Disadvantages of Adjusting the Value of Fixed Assets
As previously explained, the benefit of adjusting an inj asset is to increase an entity’s cash profit or a net income plus depreciation.
If the value of an asset is increased, then negotiating the appropriate asset price prior to a merger or takeover of the company, will use a credit balance revaluation method to replace the fixed asset at the end of its useful life , lower the leverage ratio , and also to increase depreciation as well. while reducing taxes.
However, this asset revaluation also has a drawback. The drawbacks of this are that there is a possibility that depreciation will not occur because the value of fixed assets does not decrease, the total depreciation does not show a fixed pattern, and it can also increase expenses because adjusting the value of an asset will require an expert.
Example of a Case for Recording Value Adjustment Journals
As an example, there is a company called Maju Makmur. The company purchased a machine on September 1, 2018. The acquisition cost of the machine was IDR 200,000,000.
This Prosperous Forward Company uses a straight-line depreciation method and it leaves the product with no residual value. The economic life of the machine purchased by the progressive and prosperous company is calculated to be 20 years.
Then the depreciation of the machine will be calculated per year, which is Rp. 10,000,000 (Rp. 200,000,000 / 20). Then on September 1, 2020, the machine that was purchased by the Maju Makmur company is planned to be revalued.
As information, the book value of the machine on September 1 2020 is IDR 180,000,000, so the calculation method is:
IDR 200,000,000 (cost of machine acquisition) – IDR 20,000,000 (accumulated depreciation price).
The Maju Makmur Company then hired an appraisal service to assess the fair value of the machine on the same date. Then, after making a value adjustment or revaluation, it turned out that the value of the machine purchased by the Maju Makmur company on September 1 2020 was around IDR 190,000,000.
Thus, it appears that there is a difference of IDR 10,000,000 between the book value and the adjusted value. Then the journal entry for the increase in the value of the machine purchased by the advanced and prosperous company as a result of the value adjustment or revaluation is:
Machine = IDR 10,000,000
Revaluation Surplus = IDR 10,000,000
With a remaining economic life of 18 years, in 2020 the depreciation value will be:
Machine price after value adjustment divided by year price:
IDR 190,000,000 / 18 years = IDR 10,555,555
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Apart from the benefits that you already know from adjusting asset values, you should also know that adjusting asset values is also an activity that is quite difficult to carry out. The costs incurred for doing this are also large because you have to pay from an appraiser.
However, you don’t need to worry, this is because if your business is managed in a good and correct way then the financial performance and also the value of the company will also increase.