Where the value of any fixed asset is determined by using the alternative accounting rules the amount of profit or loss arising must be credited or as the case may be debited to a separate reserve, the revaluation reserve. The calculation of the relevant amounts should be based on the written down values of the assets prior to revaluation.
The revaluation reserve must be reduced to the extent that the amounts standing to the credit of the reserves are, in the opinion of the directors of the company, no longer necessary for the purpose of the accounting policies adopted by the company.
However, an amount may only be transferred from the reserve to the profit and loss account if either,
- The amount in question was previously charged to that account.
- It represents realized profit.
The only other transfer possible from the revaluation reserve is on capitalization, that is, when a bonus issue is made.
The amount of a revaluation reserve must be shown under a separate sub heading on the balance sheet. However the reserve need not necessarily be called a “revaluation reserve”.