Question

An intangible asset is similar to any economic resource in that its value is equal to the sum of the present values of the projected cash flows related to use of the asset in operations. Plant assets are not revalued under U.S. GAAP, but revaluation is an option under IFRS. In your post, discuss the following:

What are some of the benefits of revaluation from the standpoint of a financial statement user?

What happens on the balance sheet when plant assets are revalued?

Answer 1

Continuing as per the question without considering any GAAP's or IFRS, we shall discuss the case,

1. From the viewpoint of a financial statement user, revaluation of assets has the following benefits,
   1. Actual fair market value will be known so that it will be better for decision making for banks, creditors and other intended investors,
   2. It shows the true value of the assets of the company,
   3. At the time of sale of the assets, it stands as a good means for the buyer to take decisions,
   4. Net worth of the company could be calculated with ease,
   5. At the time of mergers, company valuation depends on the fair value of the asset and not the book value,
   6. It also stands a time saving method during internal and external reconstruction.
2. Effects on balance sheet,
   1. When assets are revalued the change in the value of assets is adjusted to a seperate account called revaluation reserve account and it is shown in the balance sheet as a seperate item,
   2. There will be also be an effect on the net income as the change in value of asset effects depreciation which in turn affects net income and therefore retained earnings will also be affected.