Asset Revaluation: Methods, Benefits, Rules, and Advantages

Asset Revaluation is a change in the market value of an asset that will increase or decrease. For more details about this asset revaluation, you can read the following article. Don't forget to follow GIC Instagram so you can stay updated on trading and investing.

What is Asset Revaluation

Asset revaluation is an adjustment made to the recorded value of an asset to accurately reflect its current market value. When buying a fixed asset, it is usually recorded at the underlying price. It is likely that the market value of an asset will change over time, so businesses can choose whether to continue to value the asset at historical cost or whether to use a revaluation model, where financial records are updated to reflect the current market value of the asset. The revaluation model allows for upward and downward adjustments to reflect the increase (appreciation) and decrease (depreciation) of the asset's value, while the cost model only allows downward adjustments to account for impairment losses.

Revaluation of Assets and Their Functions

The functions of asset revaluation activities are as follows:

• To prepare for the sale of fixed assets to other parties.
• Negotiate the fair value of fixed assets before a company is acquired or merged with another company.
• To be able to update the market value of fixed assets that have been increasing since the initial purchase.
• Ensure that the company has sufficient funds to replace its fixed assets at the end of its economic life.

How to Revalue Assets

Use market-based valuations by qualified valuation specialists to determine the fair value of fixed assets. If an asset is so special that a market-based fair value cannot be obtained, then use an alternative method to get an estimate of fair value. An example of this method is using discounted future cash flows or an estimated replacement cost of an asset.

Benefits of Asset Revaluation

There are many benefits to revaluation of assets, you can get these benefits when you apply them. The benefits of Asset revaluation are:

• To show the actual rate of return on the capital used.
• To save sufficient funds in the business for the replacement of fixed assets at the end of their useful life. Depreciation allowances based on historical costs will show increased profits and lead to excessive dividend payments.
• To show the fair market value of assets that have been highly appreciated since their purchase such as land and buildings.
• Negotiating a reasonable price for a company's assets prior to a merger or acquisition by another company.
• To enable proper internal reconstruction, and external reconstruction.
• To issue shares to existing shareholders (rights issue or extended offering).
• To obtain a fair market value of an asset, in terms of sale and leaseback transactions.
• When a company intends to take a loan from a bank/financial institution by pledging its fixed assets. Proper revaluation of assets will allow the company to obtain a higher loan amount.
• Sale of an individual asset or group of assets.
• In the reserve of revaluation of financial companies is required for regulatory reasons. They are included when calculating the company's funds to provide a fairer view of resources. Only a portion of the company's total funds (usually around 20%) can be lent or in the hands of one of the counterparties at a time (large exposure restrictions).
• Lowering the leverage ratio (debt-to-equity ratio).

Rules in Asset Revaluation

(1)	The Minister of Finance is authorized to establish regulations on asset revaluation and adjustment factors in the event of a discrepancy between cost elements and income due to price developments.
(2)	For the difference in asset revaluation as intended in paragraph (1), a separate tax rate with the Regulation of the Minister of Finance shall be applied as long as it does not exceed the highest tax rate as intended in Article 17 paragraph (1).

 

Regulation of the Minister of Finance

In addition to the regulations contained in the Law, the rules for asset revaluation are also contained in PMK Number 191/PMK.10 Th. 2015 which was later amended through PMK Number 233 Th. 2015 which discusses the revaluation of fixed assets whose purpose is for taxation. Especially for the submission of applications from 2015 to 2016.  Which reads the regulation is where, taxpayers will get incentives or tax deductions. Initially, the tax rate imposed was 10% of the difference in the revaluation value of assets, then divided into three categories of tax withholding. From 3% to 6% according to the date the application is submitted. The regulations made by the government in this asset revaluation are indeed intended to encourage companies to report the value of their assets based on fair value. However, it should be noted that the tax withholding policy related to asset revaluation has actually ended since 2016. By providing different rates at each stage. The determination of different rates will be charged from the difference in the value of fixed assets from the revaluation process carried out by the taxpayer through the KJPP or the Public Valuation Service Office. 

Advantages of Asset Revaluation

1. The method is very simple and easy to understand.
2. This method can be applied to a variety of assets where the assessment of inflows of individual financial benefits cannot be easily estimated.
3. Where a business has many small assets, this method can be applied to all assets collectively assuming all smaller assets as one large asset.

Disadvantages of Asset Revaluation:

1. It is possible that the asset cannot be revalued annually or the cost of acquiring the asset may not decrease. In such cases, no depreciation can be charged on the asset.
2. The amount of depreciation charged on an asset does not show a fixed pattern.
3. The application of this method can be expensive because the implementation of revaluation requires help from experts, sometimes resulting in costs that exceed the benefits.
4. Revaluation is an area of valuation and the amount of depreciation that will be charged depends on it. So, if the revaluation is not carried out as it should, the amount of depreciation charged can be miscalculated.

After knowing about asset revaluation is a change in the market value of an asset, along with its functions, methods, and rules, you can start learning about forex, crypto, commodities, and NFTs through the GIC Journal. In addition, you need to register yourself to be able to trade starting from IDR 150,000!