Legal Definitions - revaluation surplus

A revaluation surplus occurs when a company reassesses the value of its long-term assets, such as property, plant, or equipment, and determines that their current fair market value is higher than the value at which they are currently recorded on the company's financial statements (their 'carrying value'). This increase in value is not a realized profit from sales but rather an unrealized gain that is recorded in the equity section of the company's balance sheet, reflecting an increase in the company's net worth.

• Example 1: Real Estate Appreciation

  Imagine a property development company that purchased a plot of land ten years ago for $2 million. Over time, due to significant urban growth and infrastructure development in the surrounding area, the market value of that land has dramatically increased. An independent appraisal now values the land at $7 million.

  If the company chooses to update its financial records to reflect this new market value, the $5 million difference ($7 million current value minus $2 million original value) would be recorded as a revaluation surplus. This shows an increase in the company's assets and overall net worth, even though the land hasn't been sold.

• Example 2: Specialized Machinery

  Consider a high-tech manufacturing firm that owns a unique, custom-built machine essential for its production process. This machine was initially recorded on its books at $1.5 million. Several years later, due to advancements in technology making this specific machine highly sought after and difficult to replicate, its market value has appreciated. An expert appraiser determines its current fair value to be $2 million.

  The $500,000 increase ($2 million current value minus $1.5 million book value) would be recognized as a revaluation surplus. This reflects the enhanced value of a critical asset on the company's balance sheet, without the company having sold the machine or generated profit from its use.

• Example 3: Historical Building

  A university owns a historic campus building that was acquired many decades ago and is recorded on its books at a nominal value of $500,000. Due to its architectural significance and prime location in a rapidly developing city, its actual market value has soared. A recent professional valuation assesses the building's fair market value at $10 million.

  If the university decides to revalue this asset on its financial statements, the $9.5 million difference ($10 million current value minus $500,000 book value) would be recorded as a revaluation surplus. This accounting entry accurately portrays the true economic value of the university's assets, even though the building is not for sale.