EQUITY APPRECIATION: HOW IT IS CALCULATED AND EXAMPLE - DUDAS - 2025

The revaluation of the patrimony is the reflection of the effect produced on the patrimony due to the reduction of the purchasing power of the money. Its balance may only be distributed as profit when the entity's value is capitalized or settled, in accordance with legal regulations.

It is clear that a different destination is not possible, such as it would be distributed as a profit to the partners, when the company is in full force. What is sought with the revaluation of equity is the updating of its value due to the loss suffered by each of the equity accounts that are susceptible to adjustment to the measurement unit.

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In other words, from the presence of current regulations accumulates the value caused by the decrease in the purchasing power of money. This means that it does not in itself involve a real increase in the resources of the company. Nor an additional contribution from them.

What does it consist of

In relation to this item, it can be seen that legally only two alternatives are allowed. The first, that it is distributed as profit at the time the economic entity is liquidated.

The second, that its value is capitalized. This means distributing it in shares of social interest or in shares.

Any other destination that you seek to undertake will violate the legal decree found in the regulations.

This means that there are only two options. Carry out a capitalization, for which it is necessary to carry out a transfer of accounts. To do this, the item corresponding to the revaluation of equity is canceled or decreased and that of capital is increased.

On the other hand, the asset revaluation item is simply left unchanged. It is reserved to be distributed among the partners at the time the company is liquidated.

However, what is definitely not allowed to do is distribute that inflationary value. This is because in this way the company's assets are weakened, thus violating the right of creditors.

Legal regulations

The regulations do not have established a limitation so that when the revaluation account is capitalized, the shareholders cannot receive dividends on that fraction of capital.

Equity revaluation was treated as a concept used in Colombian legislation when inflation adjustments were implemented in 1991 in equity accounts. This in accordance with decrees 291-1 for tax purposes, and 291-2 for accounting purposes.

The inflation adjustments made in the equity accounts were recognized in an account called monetary correction against the results of the year. The higher value in equity was recognized in an account named equity revaluation. Since 1992 these adjustments for inflation have been managed.

In 2007, the inflation adjustments were eliminated for accounting purposes, being rendered ineffective with Decree 1536.

In relation to the revaluation of equity, it was established that the balance of this account could not be distributed as profit to shareholders or partners. This until these values ​​are capitalized or the company is liquidated.

How it is calculated

The revaluation model gives the company the option of taking a fixed asset to its revalued amount. After the revaluation, the amount recorded in the books is the fair value of the asset. This is subtracted from subsequent accumulated depreciation and accumulated impairment losses.

Under this approach, fixed assets should continue to be revalued at sufficiently regular intervals. This is to ensure that the book value does not differ materially from the fair value in any period.

A qualified valuation specialist should be used for a market-based assessment. Thus, the fair value of a fixed asset can be determined.

If a fixed asset is of such a specialized nature that a market-based fair value cannot be obtained, then an alternative method is used to arrive at an estimated fair value.

Examples of such methods are the use of discounted future cash flows or an estimate of the replacement cost of the asset.

Revaluation model

If the choice is made to use the revaluation model and the evaluation results in an increase in the carrying amount of a fixed asset, the increase is recognized in other income. It is also accumulated in equity in an account entitled "equity revaluation."

However, if the increase reverses a decrease in revaluation for the same asset that had previously been recognized in profit and loss, the gain from the revaluation in profit and loss is recognized to the extent of the previous loss. Thus the loss is erased.

Examples

The revaluation of equity is caused by recognizing the aftermath of inflation in the resources or assets that the shareholders have as an investment in the company.

Therefore, if a capitalization of the balance that is accumulated in this account is chosen, whether total or partial, all shareholders of the same must participate. This because they are the ones who have collaborated in the establishment of heritage.

Initially, when a revaluation surplus is recorded, it is taken to equity.

It does not affect the income statement, unless the asset has been priced down in the past. In such case, the reverse of this decrease is recorded in the income statement only for the amount that was previously recognized in expenses.

For example, if the initial loss was $ 10,000 and the current revaluation surplus is $ 15,000, then $ 10,000 of this revaluation amount will be recognized in the income statement as profit. In this way the previous expense is reversed.

The remainder, which would be $ 5,000 in this case, will go directly to the equity under the Equity Revaluation line.

Conclusions

That would be the general idea behind the surplus. With debit, the value of the asset is increased and with credit, equity is increased. If necessary, a credit is added to the income statement to reflect the reversal of an expense.

When it happens, the revaluation is a separate row within equity on the balance sheet. However, there are situations in which the appreciation of equity can be transferred to retained earnings:

-When the asset is written off the balance sheet, whether it is sold or no longer used, this surplus is completely transferred.

-When a surplus is realized, which is the difference between the depreciation based on the revalued book value of the asset and the depreciation based on the original cost of the asset, it is transferred from the revaluation surplus to the retained earnings each year.

References

1. Get Updated (2005). The revaluation of equity from the accounting and tax point of view in Colombia and effects of its capitalization. Taken from: actualicese.com.
2. CR Consultores Colombia (2018). Revaluation of heritage. Taken from: crconsultorescolombia.com.
3. Accounter (2007). Capitalization of the capital appreciation. Taken from: accounter.co.
4. Accounting Tools (2018). The revaluation model. Taken from: accountingtools.com.
5. Officetodo (2013). Revaluation gains - how to treat them on your statements. Taken from: officetodo.com.