Reasons for re-valuation

It is common to see companies revaluing their fixed assets the purposes are varied:

  • To show the true rate of return on capital employed.
  • For accounting purposes (IFRS/ IAS 16).
  • 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 changed since their purchase.
  • To negotiate fair price for the assets of the company before merger with or acquisition by another company.
  • To ensureinsurance declaration values are in line with current replacement values which are constantly fluctuating as a result of market trends and currency exchange rate fluctuations.
  • 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).