Revaluation of Assets and Liabilities

In amalgamation or any business restructuring, it is essential to assess the fair value of the assets and liabilities being taken over. Often, the book values of assets and liabilities may not reflect their current market worth or economic reality. Hence, revaluation becomes a necessary step, particularly when amalgamation is in the nature of purchase.

Revaluation ensures that the balance sheet of the transferee company presents a true and fair view post-amalgamation. The accounting treatment of revalued assets and liabilities is guided by Accounting Standard 14 (AS-14) and Indian Accounting Standard 103 (Ind AS 103) in India.

Revaluation:

Revaluation refers to the process of increasing or decreasing the book value of assets or liabilities to reflect their current fair value at the time of amalgamation.

🔹 Revaluation of Assets:

• If book value < market value → Appreciation (increase) in value

• If book value > market value → Depreciation (decrease) in value

🔹 Revaluation of Liabilities:

• If book value < settlement value → Increase in liability

• If book value > settlement value → Decrease in liability

When Is Revaluation Done?

Revaluation is primarily done in amalgamation in the nature of purchase, where the transferee company may choose to record the assets and liabilities at their fair values. In contrast, for merger, assets and liabilities are usually taken at book values.

Revaluation helps:

• Show the fair value of assets and liabilities on the transferee’s balance sheet

• Calculate goodwill or capital reserve more accurately

• Prepare the company for better financial disclosures and transparency

Journal Entries for Revaluation:

The following entries are passed in the books of the transferor company before amalgamation, if revaluation is done in their books:

For Increase in Asset Value

Example of Revaluation:

Suppose, during amalgamation, the following revaluations were made in the books of the transferor company:

Entries in the Books of the Transferor:

1. Increase in building value:

2. Decrease in plant value:

3. Decrease in creditors:

Net Revaluation Reserve:

Revaluation Reserve = ₹2,00,000 – ₹1,00,000 + ₹50,000 = ₹1,50,000 (Credit Balance)

This revaluation reserve will not be transferred to the transferee unless specified in the scheme.

Impact on Purchase Consideration:

Revaluation directly impacts the calculation of goodwill or capital reserve during amalgamation.

 Formula:

Where:

• Net assets = Total Revalued Assets – Total Revalued Liabilities

• If Net Assets > Purchase Consideration → Capital Reserve

• If Net Assets < Purchase Consideration → Goodwill

Thus, upward revaluation of assets reduces the chance of goodwill and may lead to a capital reserve.

Treatment in Balance Sheet:

After amalgamation, the transferee company shows revalued assets and liabilities in its balance sheet if amalgamation is in the nature of purchase and if it chooses to record them at fair values.

If the assets are recorded at revalued figures:

• No separate revaluation reserve is created

• Difference is adjusted in goodwill or capital reserve

If the assets are taken over at book values (in the case of merger), no revaluation takes place in the transferee’s books.

Revaluation in the Nature of Merger vs Purchase