Revaluation Reserve
Revaluation Reserve
A revaluation reserve is an account used to record the difference between the book value and the market value of long-term assets at the time of revaluation. It is a mandatory reserve for certain banks and other financial institutions.
Purpose:
- To ensure that financial statements accurately reflect the market value of assets.
- To maintain the stability of the banking system by preventing banks from overvaluing their assets.
- To provide a buffer against potential losses in asset values.
Requirements:
Under the Basel II and Basel III guidelines, certain banks are required to hold a revaluation reserve. The specific requirements vary based on the country and regulatory authority. In general, banks with assets of $50 billion or more are required to hold a revaluation reserve.
Treatment:
The revaluation reserve is created when assets are revalued and the book value changes. The difference between the book value and the market value is recorded in the revaluation reserve. If the revaluation reserve is insufficient to absorb the entire loss, the bank must take other measures, such as increasing its capital reserves.
Example:
A bank revalues its investment portfolio and finds that the market value of its assets has increased. The increase in value is recorded in the revaluation reserve. If the revaluation reserve is not sufficient to absorb the entire increase, the bank must increase its capital reserves.
Additional Notes:
- The revaluation reserve is not a mandatory reserve for all banks.
- The revaluation reserve can be used to cover losses in asset values in the future.
- The revaluation reserve is typically a temporary account and the balances are zeroed out when the assets are revalued again.
