Net Worth & Solvency Glossary · Entity Finance
A revaluation reserve is the reserve a company credits when it writes an asset up to a higher value without selling it.
The gain is unrealised, so the reserve is not a free reserve, is not distributable, and is excluded from a company's net worth under the Companies Act, 2013.
How it arises
When a company restates an asset at a higher value, the asset's carrying amount goes up. The matching credit goes to a reserve, not to profit, because nothing has been earned. Land and buildings are the usual subjects, since they are the assets most likely to be carried well below what they would fetch today.
Nothing enters or leaves the business when the reserve arises. The balance sheet grows on both sides without a transaction. In accounting terms, the revaluation reserve records an unrealised gain held in equity. The exercise is legitimate and the accounting is correct, but a company can revalue its way to a much larger balance sheet without gaining a rupee it can spend.
The asset is restated at the higher value. It has not been sold.
An unrealised gain, held in equity, not in profit.
No transaction. No cash. The balance sheet is larger, and the company has not gained a rupee it can spend.
Why it is stripped out
Section 2(57) of the Companies Act, 2013 builds net worth from paid-up share capital, reserves created out of profits, the securities premium account and the credit balance of the profit and loss account, less accumulated losses, deferred expenditure and miscellaneous expenditure not written off. It expressly leaves out reserves created out of revaluation of assets, write-back of depreciation and amalgamation.
A certified figure that included the revaluation reserve would therefore be wrong, not just generous. When a CA prepares a company net worth certificate under Section 2(57), the reserve is removed and the removal is shown in the working, not absorbed silently into the total. Every other reserve is sorted the same way in Which Reserves Count Toward Company Net Worth Under Section 2(57).
A reserve schedule showing how each reserve arose.
It is not a free reserve, because it represents a gain that has not been realised.
Statute and Ind AS
The accounting framework and the statutory definition answer different questions, so both positions hold at once.
Under Ind AS, a company may choose a revaluation model for a class of property, plant and equipment. Increases are taken to the revaluation reserve through other comprehensive income. Where a revalued asset is later sold, the reserve moves to retained earnings without passing through profit.
A company that uses the cost model carries no revaluation reserve at all.
It leaves reserves created out of revaluation of assets out of net worth, whatever model the accounts follow. The practical result is that a figure lifted from the audited balance sheet needs the revaluation reserve taken out before it can be certified as net worth.
No. Section 63 of the Companies Act, 2013 allows bonus shares out of free reserves, the securities premium account or the capital redemption reserve account, and bars any bonus issue made by capitalising reserves created by revaluing assets.
Sources: Companies Act, 2013, section 2(57) (Ministry of Corporate Affairs). This entry describes Indian practice in general terms and is not advice on a particular company's accounts.
Need help with a certificate that uses revaluation reserve? See our Net Worth Certificate for Company.