In a market economy, prices for various goods that an enterprise can acquire for business activities are constantly changing. The purchase price of one or another fixed asset object in the current year may differ significantly from the one for which this object was purchased. The company can track changes in prices for those property objects that it has, make a special recalculation of their value and take into account the difference. This process is called revaluation of property (hereinafter referred to as PI). Before proceeding to a description of the system for conducting PI, consider some concepts.
What are non-current assets?
Non-current assets (hereinafter SAIs) are items of property of a company that are constantly used in its business activities. Any property that the company is not going to turn into goods for a long period is non-current assets. The SAI of the company includes: deferred tax assets, intangible assets, land, natural resources, buildings, structures, transport, livestock, various equipment, office equipment, etc.
The main criteria that determine HLW are the period of its use, which should be more than 12 months (or one operating cycle, if it is more than 12 months), and its presence at the company as an item of property that can generate income (as a means of labor). Non-current assets also include various financial investments that will bring profit to the company for more than one year, or investments that will pay off in the future after the expiration of this period. It is worth noting that the item of property may for some reason not participate in the production activities of the company at a particular time, but be considered SAI. When assigning an item of property to SAI, the main role in this case is not played by the fact of its use for generating income, but by the reason for its acquisition for this purpose. With PI, the main role is played by the replacement price of property, determined through the market value of a non-current asset.
What is the recovery and market price?
The replacement price is the cost of a full restoration of an item of property in case of breakage or loss. In other words, this is money that the company must give for the exact same item if the old one ceases to participate in production activities. The market price is the price for which the item you just bought can be sold. That is, it is money that you can get if you decide to sell the property immediately after the purchase (at the time it was included in the account).
In fact, in our case, there is no difference between the replacement and market prices. In some situations, for example, when a company gets a property item for free, it is included in the accounting at the market price. Then we can say that market value becomes initial. In our case, the market price becomes recovery.
What is the revaluation of non-current assets?
PI - a review of the price for which a specific item of property of the company was purchased, by comparing this value with the replacement. If the initial purchase price differs significantly from the recovery price, then it is necessary to mark down or revaluate a non-current asset. A significant difference between these indicators is not strictly defined by law, but the generally accepted border is 5% of the difference. If the initial price of the item of property is less than 5% of the replacement, then an additional assessment should be carried out. If the initial cost is 5% more, a markdown is required. In the future, revaluation and devaluation should be reflected. In the balance sheet, the revaluation of non-current assets is line 1340.
PI is not a mandatory factor both in the general taxation system and in the simplified one. The company may not reevaluate property at all until it becomes necessary. However, this does not mean that the company can conduct PI at any time when it pleases. The decision to carry out this procedure should be enshrined in the accounting policy.
It is worth mentioning that PI can relate to all the property of the company, as well as its part. That is, it is not necessary to overestimate everything that is. Under PI, certain groups of homogeneous objects should be formed. However, the legislature does not have a strict classification of them. Societies are allowed to independently identify these groups. By homogeneity should not be understood such things as, for example, the location of objects or their color. In this case, technical specifications, purpose of use, and the like are important. Groups of similar items should also be enshrined in accounting policies. There are two ways for PIs: directly recalculating prices and indexing.
The meaning of PI?
As already mentioned at the beginning of the article, prices for various things that can become a VOA company are constantly changing. Revaluation of non-current assets allows you to equalize the initial value of these assets and make them the same as the market prices at a given time.
There are many reasons for PI. It must be carried out if it is necessary to sell part of the property or the whole society as a whole. If the company decides to attract investment, it is also necessary to conduct a PI, if the attraction involves obtaining a loan. For this, the security price must be reliably determined. And since the guarantee is the property of the company, there is no way to do without PI. If a decision is made on the placement (issue) of securities, a revaluation of the property is also carried out, since the authorities must know the real financial situation of the company (issuer), which will issue securities into circulation.
Just for the sake of improving investment attractiveness for potential investors, PI is also needed. If the net assets of the company fall below its authorized capital, then the company runs the risk of going bankrupt. Therefore, to clarify the value of assets, a revaluation of property is also needed. If a decision has been made on property insurance, an insurance base should be formed. PI is also needed here. Revaluation reasons also include mergers and acquisitions of firms, especially if these processes relate to foreign companies operating in accordance with the International Financial Reporting Standard (IFRS). In such cases, PI is mandatory. With the moral aging of an item of property, when its market price drops sharply against the backdrop of new developments, revaluation allows you to level the value of existing items with their market price for more accurate information about the financial situation of the company. There are other reasons for PI.
Revaluation Periods
If the company once reassessed non-current assets, then then it must be periodically carried out throughout the life of the organization. Signal for PI is the significant change stated above between the price of the property subject to accounting and its market value. Revaluation at the firm should be carried out no more than once a year. It is possible to establish specific periods of this procedure in the accounting policy, but if there is a reservation about the possibility of making an unscheduled UI. In view of this factor, the company after the first revaluation must annually find information at market prices for all items of property that it has. And in the case of a significant difference of 5%, it is necessary to carry out a markdown or revaluation of the results.
In accordance with current regulations, PIs need to be carried out closer to December 31, that is, at the end of the year, and should be recorded separately. In the new year, property items are taken into account at a new price. The question arises: what to do if it is necessary to conduct a PI in the middle of the year? This issue is not regulated by law anywhere, that is, the company can reevaluate in the middle of the year, but if the data of its beginning are taken into account.
PI methods
There are two ways to reevaluate - recalculating the price directly and indexing. The recount method is the most common. For its implementation, it is necessary to determine the market price of property items subject to PI. To obtain information about this, you can use the manufacturers' websites, specialized literature, state statistics, services of independent appraisers, etc. After this, you can re-evaluate using the calculations described in the next section.
The second method of PI is practically not used. To implement it, you need to know the deflator indexes - price indices (in our case, for SAIs). Until 2001, state statistics authorities regularly provided information on the SAI price index. Now, such a service can only be obtained for a fee from the same statistical authorities.
PI Formulas
Since the revaluation of non-current assets concerns not only property items, but also the accumulated depreciation, for starters, it is necessary to calculate the depreciation (including accumulated) at the time of the PI. There are four methods for calculating depreciation, so we will skip this step.
Direct translation method
After determining the market price of the revalued item, you need to use the formula:
O = RS / PS * 100 - 100, where
- O - deviation in price in percent;
- RS - market value;
- PS - the initial or current recovery price if the item has previously been revalued.
After the calculation, the percentage (positive or negative) should be obtained. If the positive percentage is more than 5%, then this is a signal for an increase in the value of a non-current asset, and an additional assessment must be carried out. If the negative percentage is less than 5%, a markdown should be made. The value of the revaluation or devaluation is the difference between the initial and replacement price.
Next, you need to recalculate depreciation:
PA = A * O, where
- PA - restated depreciation;
- A - depreciation (including accumulated);
- O - deviation in price as a percentage.
Index method, or indexing method
In this case, the recovery (market) price is not determined using information from the outside, as in the case of direct conversion, but is calculated using deflator indices:
BC = PS * ID1 * ID2 * ID3 * ID4, where
- BC - replacement price;
- PS - initial or current replacement cost, if the item has previously been revalued;
- ID1-ID4 - deflator indexes on the SAI for four quarters of the reporting year.
After calculating the replacement price, further actions are similar to the actions for recalculating prices directly. After these calculations and accounting for PI on accounts (see below), the revaluation of non-current assets in the balance sheet is reflected. This is the final step in this procedure.
PI system
If the item is revalued for the first time, then its revaluation relates to the credit of account 83 “Additional paid-in capital”, and the markdown to debit account 91.2 “Other income and expenses”. If the PI is carried out at the beginning of the year, then in the case of markdowns, the value is credited to the debit of account 84 “Retained earnings (uncovered loss)”. Depreciation calculated using the above formula should also be revalued. The same postings are made, only the debit and credit are swapped, and depreciation accounts are used. There is nothing complicated here.
The most interesting thing starts if the subject has already been reevaluated earlier. If this happens, then the new revaluation relates to additional paid-in capital. If it is equal to the old markdown, then it is reckoned to the credit of the account 91.1. If the revaluation is greater than the previous markdown, then its residual value goes to additional capital.
If the item has already been revalued, additional capital is reduced by the value of the markdown. If it is greater than the previous value, then first the additional capital is reduced by the value of the previous revaluation, and the residual value of the markdown goes to account 91.1 if the procedure is carried out at the end of the year (December 31), or to account 84 if the markdown occurs at the beginning (January 1) .
If the item has already been discounted, then the new value is credited to account 91.2 or to account 84 if markdown occurs at the beginning of the year.
Postings
Consider the example of PI item of fixed assets.
Revaluation (first PI, or if revaluation was also earlier):
- Dt 01 Kt 83 - reflection of the revaluation.
- Dt 83 Kt 02 - increase in depreciation.
Markdown (first PI or if markdown was also earlier):
- Dt 91.2 Kt 01 - reflection markdowns.
- Dt 02 Kt 91.1 - decrease in depreciation.
Markdown (first PI at the beginning of the year or if markdown was also earlier):
- Dt 84 Kt 01 - a markdown reflection.
- Dt 02 Kt 84 - decrease in depreciation.
Revaluation (previously there was a devaluation):
- Dt 01 Kt 91.1 - reflection of the revaluation.
- Dt 91.2 Ct 02 - depreciation revaluation.
- Dt 01 Kt 83 - the residual value of the revaluation.
- Dt 83 Kt 02 - the residual value of depreciation.
Markdown (previously revaluation):
- Dt 83 Kt 01 - a markdown reflection.
- Dt 02 Kt 83 - markdown depreciation.
- Dt 91.2 Kt 01 - residual markdown value.
- Dt 02 Kt 91.1 - the residual value of depreciation.
Markdown (at the beginning of the year, previously there was a revaluation):
- Dt 83 Kt 01 - a markdown reflection.
- Dt 02 Kt 83 - markdown depreciation.
- Dt 84 Kt 01 - residual markdown value.
- Dt 02 Kt 84 - the residual value of depreciation.
Reflection of PI in the balance sheet
A PI carried out at the end of the year should be reflected in the balance sheet separately on line 1340 “Revaluation of non-current assets”. At the same time, line 1130 “Fixed assets” should be reflected with the results of PI on fixed assets included in it, and line 1350 “Additional paid-in capital (without PI)” should reflect additional capital without taking into account the results of PI. As information for filling in line 1340, the values from the credit balance on account 83 are used.