5301.7 Projects/Overheads Requiring Revaluation of Assets

Assets may need to be revalued. This is true for assets such as:-

Completed buildings
Stocks & shares
Inventory
Computer Software (in the case of software developers such as Muli)

The revaluation needs to be done realistically. Business failures such as Enron, Skase / Quintrex and the USA Sub-prime mortgages showed how not to do it.

Where the Markets have a real value, there may be a Basis for 'Mark-to- Market' accounting.

Mark-to-market Accounting (from Wikipedia)

The act of recording the price or value of a security, portfolio or account to reflect its current market value rather than its book value.

Mark-to-market (or fair value accounting) is an accounting methodology of assigning a value to a position held in a financial instrument based on the current market price for the instrument or similar instruments. For example, the final value of a futures contract that expires in 9 months will not be known until it expires. If it is marked to market, for accounting purposes, it is assigned the value that it would currently fetch in the open market.

As the practice of marking to market caught on in corporations and banks, some of them seem to have discovered that this was a tempting way to commit accounting fraud, especially when the market price could not be objectively determined (because there was no real day-to-day market available or the asset value was derived from other traded commodities, so assets were being “marked to model” in a hypothetical or synthetic manner using estimated valuations derived from financial modelling, and sometimes marked in a manipulative way to achieve spurious valuations. See Enron and the Enron scandal and closer to home, the Skase Affair.

So their market prices are not established by any active, regulated market trading. Market values are, therefore, not objectively determined or readily available.

The USA Internal Revenue Code Section 475 provides that qualified securities dealers that elect mark to market treatment shall recognise gain or loss as if the property were sold for its fair market value on the last business day of the year and any gain or loss shall be taken into account in that year.

Book Value

The IFRS (International Financial Reporting Standards) requires assets to be adjusted to a fair value being "an amount for which an asset could be exchanged, or a liability settled between knowledgeable, willing parties at an arms-length transaction”.

The Book Value is also the value at which an asset is carried on a balance sheet. In other words, the cost of an asset minus accumulated depreciation.

There is a need to revalue assets to maintain a realistic balance sheet. The assets and stock schedules provide for completing a separate business valuation using realistic recovery values in a Bear (pessimistic) market.

These revised values are then taken to the Balance sheet using one of 2 approaches to revaluations:-

1. They may be added or deducted to the Profit & loss or

2. Offset to the owners equity “Revaluation Reserve" and not brought to book until actually transacted.

If you are going to bring to account then do not forget to correctly provide for future tax implications of the Gains.