Revaluation is the difference between the market value of an asset and its original cost, also considering the negative effect of depreciation on the value of the asset.
Revaluation is, in other words, an adjustment in the value of an asset on the company's books. In this way, it seeks to reflect the current value of the asset in the market.
As we mentioned previously, the company must take depreciation into account. That is, the wear and tear that the asset has had over time. This, based on the useful life period that has been assigned to the asset.
Specifically, what a company does is request that an expert estimate the value of the asset in question in the market. This may be higher or lower than the one recorded in the books (considering depreciation).
Among the characteristics of the revaluation, the following stand out:
- It allows an upward or downward adjustment of the asset.
- Revaluation can occur due to market fluctuations. That is, factors exogenous to the company. It may be, for example, that the demand for that good has increased.
- The revaluation supposes a change in the patrimony of the company.
- It mainly applies to current assets or movable property that a company acquires.
Let's imagine that a company acquires a machinery valued at 5,000 euros and with a useful life of five years. This means that every twelve months the asset will depreciate by 20% (1,000 euros).
Suppose that after three years there is a revaluation of the machinery and they calculate that its estimated market value is 2,300 euros.
First, we must bear in mind that the value of the asset in the accounting books is 2,000 euros for the accumulated depreciation of 3,000 euros.
book value: 5,000- (3 * 1,000) = 2,000
So if your market value is 2,300, the revaluation is 300 (2,300-2,000).