Revaluation of Assets in Non-Corporate Entities under the New Compliance Framework

Introduction

With effect from 1 April 2024, the Institute of Chartered Accountants of India (ICAI) has issued a revised Guidance Note on Financial Statements of Non-Corporate Entities. The new framework prescribes fresh disclosure formats and compliance requirements for proprietorships, partnerships, LLPs, and other non-corporate entities.

A key area of compliance under the updated guidelines is the revaluation of assets, governed primarily by Accounting Standard (AS)-10 on Property, Plant and Equipment. Non-corporate entities are now required to ensure that any revaluation of fixed assets is carried out with proper valuation methods, applied to an entire class of assets, and supported by reliable fair value measurements. The revaluation surplus or deficit must be accounted for transparently, with detailed disclosures in the notes to accounts.

This ensures greater transparency, comparability, and true & fair presentation of financial statements, while aligning the reporting practices of non-corporate entities with those followed by corporate entities.

What rules / standards apply

Before revaluing assets, you must check which accounting rules apply to your non-corporate entity:

New ICAI Guidance Note on Financial Statements of Non-Corporate Entities
Effective for accounting periods beginning on or after 1 April 2024, all non-corporate entities must follow prescribed formats and disclosure requirements.
Classification of the Non-Corporate Entity
Non-corporate entities are classified into MSMEs vs Large entities (previously Levels I to IV, but recently revised) for the purpose of applicability and exemptions/relaxations of Accounting Standards.
Accounting Standard 10 (AS-10): Property, Plant and Equipment
AS-10 provides rules for initial recognition, measurement and subsequent measurement, including the option of revaluation model vs cost model. Revaluation of fixed assets is permitted under AS-10 if fair value can be measured reliably.
AS-28: Impairment of Assets, AS-2 (Inventory), etc. (if relevant) for other types of non-monetary assets / where impairment or write-downs are required. Also the Guidance Note requires disclosure of provisions, contingent liabilities etc.

Key principles for revaluation under AS-10

When opting for the revaluation model under AS-10, certain conditions and steps must be adhered to:

Class of assets: Revaluation must be done on an entire class of assets (e.g. machinery, land & buildings, vehicles etc.), not selectively on individual items, unless the class is subdivided in a way that assets are homogeneous.
Fair value measurement: The fair value must be reliably measurable. Usually this means obtaining appraisal by a professionally qualified valuer. If observable market data exists, that is preferred. If not, other valuation techniques can be used.
Frequency / “reasonable regularity”: Revaluations should be done with sufficient regularity so that the carrying amounts do not differ materially from what fair value would be at the balance sheet date. Depending on asset class and volatility, this could mean every few years.
Treatment of accumulated depreciation: At the date of revaluation, you can either:
a) Restate the gross carrying amount of the asset and adjust the accumulated depreciation proportionately; or
b) Eliminate the accumulated depreciation against the gross carrying amount and adjust the net carrying amount (so you carry the asset at its revalued amount less subsequent depreciation).
Depreciation after revaluation: After revaluation, depreciation should be based on the revalued amount (less residual value if any), over the remaining useful life. Make sure to adjust the depreciation charge accordingly.
Recognition of revaluation surplus / deficit:
- If revaluation increases carrying amount: Credit it to revaluation surplus (a component of owners’ funds, or revaluation reserve). However, if there was a previous revaluation deficit for that class charged to profit & loss, then to the extent of that previous deficit, the increase can be recognised in profit & loss.
- If revaluation decreases carrying amount: Charge it to profit & loss. But to the extent that there is a balance in the revaluation surplus for that class, it should be reduced (debited) from that surplus before charging the loss to profit & loss.
Disclosure requirements: If assets are revalued, the financial statements must disclose a number of items, such as:
1. Effective date of revaluation (when it was done)
2. Whether an independent valuer was involved
3. The methods and significant assumptions applied in estimating fair values
4. The extent to which fair values are determined by reference to observable market prices vs other valuation techniques
5. The carrying amounts (before and after revaluation), and accumulated depreciation adjustments etc.
6. Revaluation surplus for each class of PPE, and restrictions (if any) on distribution of that surplus.
No selective revaluation: Cannot pick only certain items in a class just because their value has increased. Either revalue the whole class, or follow a rolling revaluation policy with sufficiently small intervals, ensuring that for any given class revaluation is done in a period and kept reasonably up-to-date.

How this interacts with the new Guidance Note / formats for non-corporate entities

Since the Guidance Note prescribes the disclosure formats and requires that balance sheets / statements of profit & loss of non-corporate entities follow specified line items, categories and notes, revaluation has to be reflected in those formats properly. Some specific points for non-corporate entities:

You need to show comparative figures (current & previous year) even for revalued asset classes, depreciation etc.
Under notes to accounts, fixed assets schedule (gross value, accumulated depreciation, net carrying amount), changes due to revaluation, additions, disposals, etc., have to be shown. This aligns with what AS-10 requires in disclosures.
The entity’s classification (MSME or Large) will determine whether any relaxations / exemptions apply. E.g., maybe some disclosure items can be skipped or less frequent revaluation if permitted.

Practical steps to revalue assets for a non-corporate entity under this regime

Here’s how you can carry out revaluation in practice, step by step:

Step	What to do
1. Identify the asset class(es) you want to revalue	Decide which class(es) of fixed (non-current) tangible assets require revaluation (e.g. land & buildings, plant & machinery).
2. Assess whether fair value can be reliably measured	Engage a professional valuer. Collect market data (comparable sales, etc.). Assess assumptions (useful life, condition, location, etc.).
3. Decide on revaluation frequency & policy	Fix the policy: how often assets will be revalued. Document this policy in accounting policies. Ensure “reasonable regularity”.
4. Determine revaluation date	Pick a date close to (or at) reporting date. That is the date at which fair value will be assessed.
5. Compute the revalued amount and depreciation	Determine gross carrying value, accumulated depreciation up to the revaluation date. Then restate either gross & accumulated depreciation, or eliminate accumulated depreciation, to get net revalued amount. Then compute depreciation going forward over remaining useful life.
6. Record accounting entries	– For increases: debit the asset account (or accumulated depreciation) and credit revaluation reserve (owners’ funds). – For decreases: debit profit & loss for that class (to the extent revaluation surplus for that class doesn’t cover it), else adjust surplus. – Adjust depreciation accordingly.
7. Disclosures in financial statements	Under Notes to Accounts include all required items (see above). Also, ensure that the balance sheet / owner’s funds section reflects revaluation reserve under owners’ funds / capital & reserves. Provide comparative data.
8. Audit & verification	The auditor must verify that revaluation has been done according to AS-10 (or applicable AS), that the class is revalued whole, that fair value is reliable, disclosures are complete, depreciation adjustments are correct.
9. Consistency	Once you choose revaluation model for a class, continue as per policy, unless you change policy (then disclosure & justification needed). Also ensure that revaluation model is applied uniformly on a class basis.

Some pitfalls / issues to watch out for

Fair value not reliable: If you cannot obtain reliable valuation (e.g. no observable market data, subjectivity high), then revaluation model shouldn’t be used. You stay with cost model.
Selective revaluation or frequent patching: Doing revaluation only for a few items arbitrarily in a class can breach AS-10.
Neglecting to adjust depreciation: If revaluation done, depreciation must be recomputed on the revised amount. Failure to adjust will misstate profit / loss.
Not disclosing assumptions: If major assumption (like rate, condition, remainder life etc.) is not disclosed, users of financials may misinterpret the value.
Impact on taxation / other regulations: Revaluation reserves may not be considered taxable income in many cases; but some regulatory/tax authorities may have their own view. Also, statutory / tax depreciation might still follow different rules (for tax filings). Must check applicability.
Movement between MSME / large status: If your entity transitions from MSME to non-MSME or vice versa, ensure that any change in applicability of accounting standards / exemptions is disclosed properly. Not to restate previous years merely due to change in classification, but disclose.

Please share