Revaluation Reserve
A revaluation reserve is a component of equity created when a company revalues a fixed asset (typically land or buildings) to its current fair value above its historical cost, with the surplus recognised directly in other comprehensive income under Ind AS rather than through the profit and loss account.
Under Ind AS 16 (Property, Plant and Equipment), companies may choose between the cost model (assets carried at cost less accumulated depreciation and impairment) and the revaluation model (assets carried at fair value on the date of revaluation less subsequent depreciation and impairment). When the revaluation model is applied, an upward revaluation results in an increase in the carrying amount of the asset and a corresponding credit to a revaluation surplus (reserve) in other comprehensive income, which accumulates in equity.
The revaluation reserve does not flow through the profit and loss account and therefore does not contribute to reported earnings per share or return on equity in the conventional sense. This is an important distinction: a company that revalues its land from ₹50 crore to ₹500 crore reports a ₹450 crore increase in net worth, but this is entirely non-cash and does not represent an earned profit — it is an accounting recognition of an unrealised gain.
For investors, large revaluation reserves on old industrial or real estate assets can be significant in asset-value investing. Textile companies, mills in urban areas, and older manufacturing entities sitting on prime city land accumulated enormous latent real estate value over decades. The book value after revaluation provided a floor on intrinsic value that was often substantially above the enterprise value of the business operations alone.
However, caution is warranted. The revalued figure must be based on a credible independent appraisal, and the frequency of revaluation matters — an asset revalued once a decade may diverge significantly from current market value. Also, when a revalued asset is depreciated, the depreciation charge is based on the revalued amount, which is higher than cost-model depreciation, reducing reported profits without a corresponding cash outflow change.
If a revalued asset is subsequently sold, the gain recognised in the income statement is measured against the revalued carrying amount (not historical cost), so the accounting gain on disposal is smaller than the economic gain. The revaluation reserve accumulated in equity is simultaneously transferred to retained earnings, a movement that again does not flow through the income statement.