When an asset that was previously revalued is sold, how should the revaluation reserve be treated?

When an asset that was previously revalued is sold, how should the revaluation reserve be treated?

• A. Transfer what's in the revaluation reserve to retained earnings as a movement on reserves
• B. Debit the revaluation reserve
• C. Recognize in profit or loss
• D. Create a new revaluation reserve

Answer: (A)

When using the revaluation model, increases in asset value are kept in an equity reserve called the revaluation surplus. This reserve represents unrealized gains tied to the asset. When the asset is sold, those gains become realized, so the balance in the revaluation surplus related to that asset is released to retained earnings. This treats the gain as part of accumulated profits now that the asset’s value has been realized through disposal. So the correct approach is to transfer what's in the revaluation reserve to retained earnings as a movement on reserves. This reflects that the asset is no longer held and the unrealized gain has been realized. The other options would either leave the reserve untouched, reduce it inappropriately, recognize the gain in profit or loss, or create a new reserve, none of which align with the standard treatment on disposal.

When using the revaluation model, increases in asset value are kept in an equity reserve called the revaluation surplus. This reserve represents unrealized gains tied to the asset. When the asset is sold, those gains become realized, so the balance in the revaluation surplus related to that asset is released to retained earnings. This treats the gain as part of accumulated profits now that the asset’s value has been realized through disposal.

So the correct approach is to transfer what's in the revaluation reserve to retained earnings as a movement on reserves. This reflects that the asset is no longer held and the unrealized gain has been realized. The other options would either leave the reserve untouched, reduce it inappropriately, recognize the gain in profit or loss, or create a new reserve, none of which align with the standard treatment on disposal.