It is a method which is used in accounting and finance to calculate the fair market value of fixed assets at a given point in time. After the revaluation of an asset, it is recorded on its fair market value rather than its historical cost value and the difference between the two values is adjusted accordingly.
The historical cost values of the assets are not accurate as the market values keep on changing with the passage of time due to external factors related to the economy. Therefore, revaluation helps to record the assets on their fair market value to portray accurate accounting information to the internal as well as the external users.
It is to be noted that revaluation can only be conducted by IFRS certified accountant so as to portray the changes in the value of the assets in a right manner. This method is widely used during mergers or acquisition, at the time of taking loans by pledging fixed assets, to follow regulations or at the time of selling of fixed assets.
Sometimes, fixed assets lose their values after revaluation which is mostly conducted at the time of selling. When an asset is recorded at its fair market value which is less than the historical cost price, the difference of the amount is known as impairment loss which is needed to be included in the financial accounting.
There can be number of reasons for impairment of an asset which mainly include damages or changes in market condition etc. Firms are required to evaluate their assets from time to time so as to record the impairment losses.