What effects will the decision not to revalue have on the firm's financial statements?

Answer 1

An entity can decide to value an asset of the Cost or Revaluation Method.

The Cost method will resulting in the Asset being carried at its original cost throughtout it economic life

The Revaluation Method will lead to the Asset being revalued to a higher Carrying Value

- This will lead to:

The recognition of the Revaluation in Other Comprehensive Income (Increasing Total Income)

Higher Defered Tax Liability

Higher Depreciation Expenses going through profit and loss (assuming depreciable asset and stable estimated useful life and residual value.)

However over time these treatments will tend to equate

As any disposal of the asset will result in a higher profit/(Smaller Loss) if treated according to the Cost Method than on the revaluation method.

Tax Treatment will be the same as the Tax Authority will regard the asset at a predetermined value regardless.

Example (Non-depreciable Asset) Tax Rate of 10% Capital Gains- Very Simplistic

Cost 100 (Year XXX1)

Revalued Estimate 125 (Year XXX2)

Selling Price 200 (Year XXX3)

Cost Method

Year XXX1

Asset Value 100

Effect on year Profit 0

Tax 0

Year XXX2

Asset Value 100

Effect on year Profit 0

Tax 0

Year XXX3

Asset Value 0

Effect on year Profit 90 (Net of tax Effect)

Tax 10

Net: Profit 90 Tax 10

Revaluation Method

Year XXX1

Asset Value 100

Effect on year Profit 0

Tax 0

Year XXX2

Asset Value 125

Effect on year Profit 22.5 (Net of Tax Effect)

Tax 2.5 (Defered)

Year XXX3

Asset Value 0

Effect on year Profit 67.5 (Net of tax Effect)

Tax 7.5

Net: Profit 90 Tax 10