Disposing assets with a revaluation surplus

You’re using valuation method to account for the cost of your fixed assets and every now and then you need to value your assets up leaving you with a revaluation surplus as a part of the equity.

What happens if you dispose of the asset however? What happens with the revaluation surplus? Regardless of how you’ve decided to treat the surplus while depreciating the asset over it’s use, if you decide to dispose the asset and it has a revaluation surplus remaining on the balance sheet, it needs to be accounted somehow. 

This “somehow” is as follows: once you’ve decided to dispose of the asset, you account for the disposal as you’d do with any other asset – cost credited, accumulated depreciation debited on the balance sheet and the difference between those two debited into expense on the income statement. The revaluation surplus in this case would be accounted directly to retained earnings – Db Revaluation Surplus and Cr Retained Earnings.

The reason for accounting the surplus directly to retained earnings rather then profits of the current period is to not affect current year results with one-off transactions that aren’t in any way relating to current period actions – no revaluation was really done per say, no actions were taken which would need to be reflected as profits for the period relating to the asset. And if you think about it, the surplus relates to a revaluation done in some prior period – even more so should the surplus be accounted into retained earnings.