Revaluations of Lands and Buildings: What shall be taken into consideration before its application? What impact do they have in Company´s Financial Statements?
A frequent question done by the customers related with lands and buildings is in what circumstances must I do a revaluation?
In this matter the NIC 16, considers that lands, site and equipment can be measured at Cost or Revaluated Value (which is equivalent in the measurement date, to the reasonable value) and it is at this time where the companies must analyze if their lands and/or buildings costs reflect economic reality of such actives.
It is usual to find within company’s accounting, lands or buildings with very low costs (related with value in the market) due to the fact that they were acquired many years ago or where acquired through partners contributions at lower costs for example.
Following some aspects that must be known by the company that is thinking about revaluating its actives are presented:
- The revaluation method can obtain a better use when actives which its costs differ from the market values are revaluated. That is why making revaluations to actives recently acquired in the conditions and regulations of the market, will probably not provide values quite different from the ones already registered.
- The implementation of the revaluation method will generate permanent and/or temporary differences between the financial base and the tax base, so it must be submitted to the application of the NIC 12.
- Once the revaluation method is implemented for a type of actives, it must be applied to all of the actives of such kind, and it cannot be changed to the cost model in future periods.
- The active revaluation not only make an estimate of their current value, but also of their useful life, so both factors may be affected with its application, which will inevitably have effect on the depreciations.
- The revaluations must be done frequently enough, in case no extraordinary conditions exist in the market, the NIC 16 establishes revaluations every 3 to 5 years.
- The increases on the value for the effect of revaluation are known in patrimony as Revaluation Surplus, in case of depreciable actives, this recognition in Surplus will be done net of deferred income tax.
- The decreases in the value as a result of revaluations will be recognized first against the Revaluation Surplus previously registered, in case that this is already exhausted, the decrease on the value will be recognized as a loss in the period it occurs.
- The increases and decreases of the value of the actives generated by the applications of the revaluation method, do not form part of the income tax base.
- For financial effects the depreciation of the revaluated actives will be done for the remaining useful life of the actives and based on the revaluated values, while for tax effect the depreciations must be maintained according to the historic values and useful life allowed by law.
It is important that the companies do an integral analysis of the adjustments, effects, and implications that the application of the revaluation method of lands and buildings bring, as well as the impact in the clarity and reasonability of the financial information that will contribute their financial statements.
Lic. Eduardo Sandi Zuñiga
GCF Consultores Partner, member of the international firm TGS Global