Whether Companies Choose to Revalue Non-Current Asset

           Whether Companies Choose to Revalue Non-current asset

In finance, non-current assets usually produce depreciation expense, impairment of non-current assets, repair costs and improved expenditure in one period because non-current asset are generally larger and have longer useful life. Therefore, most of non-current assets need to be revalued. Revaluation of non-current assets is the process of increasing or decreasing their carrying amount value in case of major changes in fair market value of the non-current asset. Besides, revaluation of non-current assets is a technique which can describes the value of the capital goods according to fair value of the assets. The revaluation detects changes in market value due to market trends. Whether revalue non-current assets has become a controversial discussion of companies. This paper will discuss the merits and demerits of revaluing non-current asset.

There are some reasons why some companies revalue non-current assets. Firstly, revalue assets can show the true rate of return on capital employed. Secondly, some non-current assets have considerably appreciated which can be shown the fair market value of assets since companies purchase them. In addition, if companies intend to merger with or acquisition by another company, they need to negotiate the true fair price for the assets by revaluing these assets. Moreover, when companies plan to take a loan from banks or financial institutions by mortgaging its non-current assets, proper revaluation of assets would help companies get a higher amount of loan. When companies face a risk of financial crisis or cash flow difficulties, revalue asset can be a solution to solve these difficulties (Brown, Izan and Loh, 1992). Internal reconstruction and external reconstruction also need to assets’ revaluation. In financial firms revaluation reserves are required for regulatory reasons because financial committees monitor companies’ funds within a fairer view of resources. For instance, International Financial Reporting Standards (IFRS) requires non-current assets to be initially recorded at cost. Another example is that only about 20% portion of the total funds can be loaned or in the hands, which is a restriction of large cash flow risk. This process can decrease the leverage ratio like the ratio of debt to equity. Due to the decrease of debt to equity ratio, interest expense will decline leading to income increase in companies.

However, most companies would not to choose revalue non-current assets due to the cost. The whole procedure of revaluing assets is pricy. Yao, Percy and Hu (2015) investigate the relationship between revaluations of non-current assets and audit fees in the Australian. They find that there is a positive relation between current-asset fair value exposure and audit fees. Companies that revalue non-current assets upwards incurred higher audit fees. In other words, the audit fees of companies that revalue assets frequently are higher than those seldom revalue assets’ companies. Revaluation usually produces higher audit fees which will decline the companies’ profit. Therefore most companies do not choose. Furthermore, in many countries, revalue non-current assets such as land, buildings and real estate usually get upward revaluation, which means that these assets’ value keeps rising from year to year. With the value of non-current asset increase, depreciation expense increase at the same time. Depreciation expense is greater after an upward revaluation which results in lower reported profits. This is not merely a movement of profits from one period to another. The fact is that when depreciation expenses are increased, profits are lost and are not regained in subsequent periods. Some companies intend to upward revaluation in order to get more loans from banks, which probably cause fraud. So in USA, the national accounting standards (US GAAP) do not allow companies upward revaluations while companies reporting financial status (Adina, 2013). Additionally, whether upward revaluation or downward revaluation both have an impact on the tax payment. In Romania, Fiscal Code establishes a different taxation scheme that is directly associated to their gross book value and revaluation frequency (Adina, 2013, p1198). As a result, many companies do not intent to pay more tax if it is an upward revaluation or do not want to charge more fees to ask accountant to reformulate the new tax base. Finally, Henderson and Goodwin argue (1992, p85) that revaluing assets destroy the logic of the system and often bring a maintenance concept in accounting reports.