Revaluation reserve
A statutory reserve that arises when assets are measured at current value above historical cost. Not freely distributable as long as the surplus has not been realised.
What does revaluation reserve mean?
A statutory reserve that arises when assets are measured at current value above historical cost. Not freely distributable as long as the surplus has not been realised.
A positive revaluation to current value can create a restricted reserve. The amount is not treated as freely available profit as long as the statutory conditions for release have not been met. The measurement method and movements require disclosure in the notes.
How does it work?
If the entity measures tangible or intangible fixed assets or inventories above cost, the increase in value goes not to the result but to a revaluation reserve (art. 2:390(1) DCC). Exceptions: investment property at fair value processes the change in value in the profit and loss account and also forms a revaluation reserve (RJk B2.206); for participating interests and securities at current value that is also allowed (art. 2:384(7) DCC). Inventories may only be measured above cost if they are agricultural inventories (RJk B4.103). It is a statutory reserve (art. 2:373(4) DCC) and therefore does not count towards the distribution room of art. 2:216(1) DCC. It may be reduced by the deferred tax liability on the revaluation (art. 2:390(1) DCC); the notes explain how the tax effect has been taken into account (paragraph 5).
The reserve is never higher than the difference between the carrying amount at current value and that at cost (paragraph 3). It falls along with depreciation on the revalued part and falls away on sale of the asset. The realised part goes to other reserves or through the profit and loss account via a separate item (RJ 240; paragraph 4).
Example
A BV has a business building with a carrying amount of € 300.000 at cost and switches to current value: € 360.000. Of the surplus of € 60.000, at a rate of 25,8%, € 15.480 goes to the provision for deferred taxes and € 44.520 to the revaluation reserve. The building is still depreciated over 30 years: the additional depreciation is € 2.000 per year. Each year € 1.484 (2.000 minus 25,8%) of the reserve therefore moves to other reserves.
In the annual accounts
Equity; relevant notes mainly for non-micro regimes.
Difference from a hidden reserve
When measured at cost, the same surplus exists too, but it appears nowhere on the balance sheet: a hidden reserve. The revaluation reserve only arises when you recognise the asset at current value. Equity then rises, the amount you may distribute does not.
Common mistakes
- Distributing unrealised revaluation as dividend
- Forgetting the tax effect
What to watch for
- Keep track per asset of which part of the reserve belongs to it; on sale exactly that amount is withdrawn.
- Revalue the whole category to which the asset belongs and update the value regularly (RJ 212; for micro and small RJk B2.114).
- Small: the movement schedule of equity is mandatory only for this reserve (art. 2:396(5) DCC). Micro: equity appears in a single item (art. 2:395a(4) DCC).
Legal basis and source
art. 2:390 DCC
Frequently asked questions
May I pay out the revaluation reserve as dividend?
No. A distribution is only possible to the extent that equity exceeds the statutory and articles-based reserves (article 2:216(1) DCC). Converting it into share capital is allowed (article 2:390(2) DCC).
Do I pay tax on a revaluation?
Not at the time of revaluation. For tax purposes the asset stays at the old carrying amount; the tax follows on sale or through lower tax depreciation.
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