Fixed assets have a dynamic value or change over time. Some assets have a value that tends to decrease from their value when they were first acquired. But, some others have values that tend to rise. It is even very suitable for use as a long-term investment.
The dynamics of changes in asset prices can make a company’s financial statements inaccurate. As a result, the data in the report does not truly reflect the true capabilities of the company. This will be a factor that will influence the company’s decisions and undermine the company’s credibility in the eyes of investors, donors and creditors. Therefore, companies need to revaluate assets periodically to obtain asset prices that are more in line with prevailing market prices.
What is Asset Revaluation?
Asset revaluation is the revaluation of the company’s assets to obtain a fair value for these assets. The assets in question are tangible fixed assets. Not intangible assets let alone current assets.
Revaluation is carried out on assets whose value has previously been known. For example, a company buys property with a value of several hundred million. When selling the property to another party, the company can do a revaluation to find out the value of the property based on market prices.
Meanwhile, for assets whose value has never been known, the term used is valuation. For example, a company will buy a property, in order to be able to offer the property at a reasonable price, the company can first evaluate the property to know its value in the market at that time.
Revaluation Benefits
In general, revaluations are carried out so that the company knows the current value of assets in the market. Because the dynamics of price changes can occur at any time, an asset has the opportunity to become more expensive or cheaper at any time.
While other benefits obtained by revaluing are as follows:
1. Knowing the condition of the company more accurately
Doing a revaluation can help to know the condition of the company better. Tangible fixed assets that are revalued are one of the elements included in the financial statements. So that information related to tangible fixed assets will be used to assess the company’s financial condition. If the data misses what it should, the assessment of the company’s capabilities will also be inaccurate.
2. Correcting the tax burden to be paid
Tangible fixed assets are objects of tax. Each fixed asset has taxes that must be paid each period. However, tangible fixed assets have dynamics, not only the value is getting higher but some are depreciating or decreasing in asset value. Examples of assets that experience depreciation are machinery, motorized vehicles, furniture, property, buildings and others.
Assets that normally experience depreciation have special tax treatment. So that the tax that must be paid each period tends to shrink. Therefore a revaluation is needed so that the tax that must be paid by the company can be lighter.
3. Maintain credibility in the eyes of investors and potential investors
The value of tangible fixed assets is recorded in the financial statements which will be distributed to investors and potential investors. It is unlikely that a company will provide a fixed asset value based on the price the asset was purchased for the first time. Because basically the value of these assets is not the same, some are experiencing depreciation while others are experiencing appreciation.
Data errors in financial reports can make investors make wrong decisions. Therefore the data presented in the financial statements must be correct. When investors know that asset data does not match their fair value, this can drop the company’s credibility in the eyes of investors and potential investors.
The value of the company’s fixed assets in principle always changes following the market value. Changes in the value of these assets can be caused by macro and micro economic factors. Macro factors such as inflation or devaluation and other factors outside the economy but have a direct effect on the economy. Meanwhile, micro factors, for example, decrease in the value of the economic benefits of these assets.
Therefore the company is required to revaluate its assets periodically. Both upward adjustments (appreciation) for assets whose value tends to increase, such as land, as well as downward adjustments (depreciation) for fixed assets whose economic benefit values have decreased, such as production machines.
One important thing to note, asset revaluation only applies to tangible fixed assets such as buildings, land or production machinery. Meanwhile, for intangible assets such as copyrights, patents, lease rights, franchises and trademarks, asset revaluation cannot be carried out.
Asset Revaluation Purpose
Asset revaluation has two objectives. Namely, for financial reporting and taxation. In terms of financial reporting, adjusting the value of fixed assets helps companies show a fair and realistic fixed asset value to investors. Asset value, which is a reflection of a company’s financial position, is one of the factors considered by investors in assessing the feasibility of a company as a place to invest.
From a tax perspective, asset revaluation is related to the company’s tax burden. Asset revaluation will produce a fair asset value which of course has a direct effect on the amount of tax that must be paid by the company. If the value of a company’s fixed assets depreciates, then the amount of tax that must be paid will naturally decrease. Conversely, if the value of fixed assets increases, the amount of tax that must be paid also increases, this means that the company makes a greater contribution to state tax revenues.
Asset Revaluation Method
Fixed asset revaluation can be done using two analytical methods. Namely, the cost method and the revaluation method.
The cost method is an adjustment in the value of fixed assets based on acquisition cost less accumulated depreciation costs and accumulated losses. This accumulated depreciation expense is used to identify net book value. While the revaluation method is carried out by reducing the fair value on the revaluation date with accumulated depreciation costs after the revaluation date.
