Revaluation reserve definition

What does Revaluation reserve mean?

Arises as a result of increases in value of property, plant and equipment accounted for at fair value, which are shown outside profit or loss. Can be used to offset decreases in value of the same asset but not decreases in value of different assets. The reserve is transferred to retained earnings when the relevant fixed asset is disposed of. Can be used for a share buy back out of capital but not for a capital reduction (although it could be capitalised into shares and then reduced). Can also be used for a bonus issue of shares. Both FRS 102 and IFRS require changes in the value of investment property to be shown in profit or loss, so a revaluation reserve does not automatically arise. However it is common for companies holding investment property to set up a revaluation reserve and transfer the changes in value to a revaluation reserve as a reserve transfer. This helps avoid such gains, which are not realised profits, being distributed accidentally.

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