Revaluation differences

What it means

Revaluation differences are changes in the value of assets and liabilities that accounting rules require to be taken directly to equity rather than to profit or loss. They arise mainly on remeasurement to fair value and when stakes are carried under the equity method.

Typical examples are available-for-sale securities, stakes in subsidiaries and associates and hedging derivatives. Revaluation differences also arise in some company reorganisations, such as mergers or a change of legal form.

They are unrealised changes in value. They are not profit from which dividends can be paid, and they appear on the balance sheet as a separate line within equity. They pass into profit or loss only when the asset is sold or otherwise disposed of.

How it works in practice

When preparing financial statements with revaluation differences, we make sure it is clear which part of equity is realised profit and which is merely revaluation. Revaluation differences are excluded from the profit proposed for distribution.

For tax, revaluation differences are usually not included in the tax base when they arise. The gap between an asset’s accounting and tax value may, however, give rise to deferred tax, which must be assessed at year end.

In reorganisations such as mergers, revaluation differences arise from the difference between the value of the assets taken over and the value of the stake. Accounting for them is technically demanding, and we recommend taking advice before the effective date.

What to watch out for

The most common mistake is paying dividends out of equity inflated by revaluation. Unrealised gains are not cash, and paying them out may breach the rules on profit distribution and endanger the company’s capital.

The second risk is booking a change in value to profit or loss instead of revaluation differences, or the other way round. That distorts profit, tax and the ratios the bank monitors.