Reasons For Revaluation
It is common to see companies revaluing their fixed assets. It is important to make the distinctions between a 'private' revaluation to a 'public' revaluation which is carried out in the financial reports. The purposes are varied:
- To show the true rate of return on capital employed.
- To conserve adequate funds in the business for replacement of fixed assets at the end of their useful lives. Provision for depreciation based on historic cost will show inflated profits and lead to payment of excessive dividends.
- To show the fair market value of assets which have considerably appreciated since their purchase such as land and buildings.
- To negotiate fair price for the assets of the company before merger with or acquisition by another company.
- To enable proper internal reconstruction, and external reconstruction.
- To issue shares to existing shareholders (rights issue or follow-on offering).
- To get fair market value of assets, in case of sale and leaseback transaction.
- When the company intends to take a loan from banks/financial institutions by mortgaging its fixed assets. Proper revaluation of assets would enable the company to get a higher amount of loan.
- Sale of an individual asset or group of assets.
- In financial firms revaluation reserves are required for regulatory reasons. They are included when calculating a firm's funds to give a fairer view of resources. Only a portion of the firm's total funds (usually about 20%) can be loaned or in the hands of any one counterparty at any one time (large exposures restrictions).
- To decrease the leverage ratio (the ratio of debt to equity).
Read more about this topic: Revaluation Of Fixed Assets
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