How to Treat Revaluation Reserve in Your Accounts (Malaysia Edition)

Revaluation reserve is a sometimes misunderstood but important equity account in financial statements. It reflects increases (or decreases) in the value of assets when their fair market value diverges from their book carrying value. In Malaysia, applying the revaluation model correctly under accounting standards (MASB / MFRS) helps present a more faithful financial picture especially for assets like land, buildings, or machinery.

This guide, brought to you by PRESS a digital PR agency explains how to record revaluation reserves in your accounts, with examples, journal entries, and Malaysia-specific practices.

What Is Revaluation Reserve?

A revaluation reserve (or revaluation surplus) is a non‑cash equity reserve that arises when an asset (typically property, plant & equipment) is revalued upward to fair value above its carrying amount. The difference is not recorded as income but credited to this reserve within equity.

• It reflects unrealised gains (since you haven’t sold the asset).
• It preserves separation between operating profit and valuation adjustments.
• Under MFRS / MASB guidance ( in Malaysia’s version of IAS 16 / MASB 15), when an asset’s carrying amount is increased, the increase is credited to equity under a “revaluation surplus / reserve.”

However, revaluation is not mandatory, you may use the cost model instead. The revaluation model may only be used if fair value can be measured reliably. 

Also, note that intangible assets that don’t have an active market often cannot be reliably revalued. 

Accounting Treatment: Journal Entries & Process

Revaluing an asset? Here’s how to handle it properly in your accounting records, step by step.

Step 1: Determine New Fair Value

Obtain a reliable fair value measurement (often via an independent valuer) and revalue with sufficient regularity so the carrying amount is not materially different from fair value.

You’ll likely need to:

• Adjust or remove accumulated depreciation
• Update the asset’s carrying value
• Record the difference in revaluation reserve or in profit/loss as applicable

Step 2: Journal Entry for an Upward Revaluation

If fair value is higher than carrying amount, you may handle accumulated depreciation in either of the two methods permitted by the standard:

Option A (Net method):

1. Remove accumulated depreciation (set it to zero)
2. Adjust the asset’s carrying value to match the new valuation (top up)
3. Recognise the gain in the Revaluation Reserve (credit)

Example:

• Original cost: RM 500,000
• Accumulated depreciation: RM 80,000
• Net book value (carrying amount): RM 420,000
• New fair value after revaluation: RM 550,000

The total increase in value from RM 420,000 to RM 550,000 is:  RM 130,000

Journal Entry:

This breaks down as:

• You eliminate the accumulated depreciation
• You increase the gross value of the building by RM 50,000
• The total revaluation surplus (RM 130,000) goes into equity via Revaluation Reserve and reflects the total increase in the asset’s carrying value.

Step 3: Journal Entry for a Downward Revaluation (Impairment-like)

If asset value drops:

1. Use any existing Revaluation Reserve first (recognise the decrease in OCI to the extent of that asset’s surplus).
2. Any shortfall goes to Profit & Loss (expenses)

Example A: Drop within reserve

• Fair value drop = RM 80,000
• Reserve available = RM 100,000

Journal Entry:

Example B: Drop exceeds reserve

• Fair value drop = RM 120,000
• Reserve available = RM 100,000

Journal Entry:

Step 4: Depreciation After Revaluation

After revaluation, recalculate depreciation based on the new revalued amount, spread over the remaining useful life of the asset. This means depreciation expense may increase after a revaluation.

Step 5: Disposal or Write-off

When the asset is sold or written off:

1. Transfer the related Revaluation Reserve to Retained Earnings
2. Do not route through Profit & Loss
3. Recognise gain or loss on disposal in the normal way (selling price minus carrying amount after revaluation).

Malaysia-Specific Rules & Best Practices for Revaluation

1. Revaluation gains go to equity, not profit

Under MASB and MFRS 116, any increase in asset value is recorded in a Revaluation Reserve (under equity), not in the profit and loss statement.

2. Revaluation reserve is not distributable

Under the Companies Act 2016, dividends may only be paid out of profits and subject to a solvency test. Because the revaluation reserve is an unrealised OCI balance, it is not distributable as dividends while the asset is held.

3. Reserve transfer bypasses P&L

When the asset is sold, the reserve is transferred to Retained Earnings, not recycled through P&L. This keeps your income statement clean.

4. All assets in the class must be revalued

If you revalue one building, you must revalue all buildings in that class for consistency. Partial revaluation is not allowed.

5. Keep valuations up to date

Revaluations must be done regularly to ensure the asset’s book value is not materially different from its fair value. Stale values can mislead stakeholders.

6. Impairments must be recognised

If a revalued asset suffers a loss in value, recognise the decrease in OCI to the extent of any existing revaluation surplus for that asset; any excess goes to P&L. Under the cost model, impairment losses are recognised in P&L.

Advantages, Risks & Strategic Use

Advantages:

• Improves balance sheet accuracy
  Shows the current fair value of assets, making your accounts more credible and transparent.
• Boosts borrowing potential
  Banks and investors see stronger asset backing, which can support higher loan limits.
• Useful for appreciating assets
  Ideal in sectors like property or land-based industries where values tend to rise over time.

Risks & Downsides:

• Valuation isn’t always objective
  Revaluations rely on appraisals, poor or biased estimates may mislead stakeholders.
• Higher depreciation charges
  Revalued assets have higher book values, which may lead to lower reported profits due to increased depreciation.
• Possible tax scrutiny
  Large or frequent revaluations might raise red flags with tax authorities, especially if tied to loan applications.
• Auditor requirements
  Auditors will demand valid, independent valuation reports,this adds cost and complexity.
• Not cash-backed
  The reserve is unrealised, it cannot be used to pay liabilities or declared as dividends.

Conclusion: Why Revaluation Reserve Matters & When to Engage Experts

Revaluation reserve is a powerful tool when used correctly. It allows your financials to reflect more realistic asset values and strengthens stakeholder confidence, especially when pitching to investors, renewing loans, or prepping for expansion.

But caution must be exercised: journal entries must respect accounting standards, gains must flow through equity (not income), and downward adjustments must consider prior reserves. For Malaysian companies, following MASB / MFRS guidance and obtaining reliable valuations is key.

If your revaluation is part of a wider visibility, listing, or growth play, consider pairing it with a communications strategy. PRESS helps businesses turn financial milestones like revaluation disclosures, audit wins, or valuation raises into compelling digital PR stories that build trust and attract investor attention.