## Transfer of Revaluation Reserve to Retained Earnings

Revaluation Reserve (RR) is created when an asset is revalued upward. Over time, this unrealised gain gets realised — and must be transferred to Retained Earnings in two scenarios.

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### Mandatory Transfer

Transfer is compulsory when:

1. The useful life of the PPE expires (fully depreciated / scrapped)

2. The PPE is sold / disposed

Journal Entry:

Revaluation Reserve A/c Dr [balance in RR for that asset]

To Retained Earnings [same amount]

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### Optional Transfer – Excess Depreciation

Each year after revaluation, the company may (optionally) transfer the excess depreciation from RR to Retained Earnings.

Excess Depreciation = Depreciation charged after revaluation − Depreciation that would have been charged on original cost

> Rationale: The incremental depreciation arising from the upward revaluation is still an unrealised gain — it gets "realised" as the asset is consumed through use.

Journal Entry (optional, annual):

Revaluation Reserve A/c Dr [excess depn]

To Retained Earnings [excess depn]

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### Balance Sheet Impact

Event	RR	Retained Earnings
Revaluation	↑	No change
Annual excess depn transfer (optional)	↓ slightly each year	↑
Asset sold/fully depreciated (mandatory)	→ 0	↑

> RR cannot be distributed as dividend — it is an unrealised reserve. Once transferred to Retained Earnings, it can be distributed.

Worked example

### Example 1

Excess Depreciation Example:

Given:

PPE on Day 0: ₹10 L, Life = 10 years
Yr 1 Depn (SLM): ₹1 L → CA end of Yr 1 = ₹9 L
FV at end of Yr 1: ₹12 L → Revaluation Gain = ₹3 L

At revaluation (end of Yr 1):

PPE A/c Dr ₹3 L / To Revaluation Reserve ₹3 L

Revised position: CA = ₹12 L, Remaining life = 9 years

Yr 2 depreciation:

= ₹12 L ÷ 9 yrs = ₹1.33 L

Excess depreciation in Yr 2:

= ₹1.33 L − ₹1.00 L = ₹0.33 L

Optional JE at end of Yr 2:

Revaluation Reserve A/c Dr ₹0.33 L

To Retained Earnings ₹0.33 L

B/S position (Reserves & Surplus):


Revaluation Reserve	₹3.00 L − ₹0.33 L = ₹2.67 L
Retained Earnings	+₹0.33 L

This optional transfer continues each year until either the full RR is transferred (when asset is sold/scrapped) or the company stops exercising the option.

⚠️ Common exam mistakes

Treating the transfer of RR to Retained Earnings as a P&L item — it is a movement within equity (Reserves & Surplus), not an income or expense.
Making the excess depreciation transfer mandatory every year — it is optional; the company can choose not to transfer annually and only transfer on disposal/end of life.
Calculating excess depreciation incorrectly: it is depn on revalued amount MINUS depn on original carrying amount (before revaluation), not the full post-revaluation depreciation.
Forgetting to reduce the RR balance by the annual excess depn transfer — the RR must be reduced as transfers are made, otherwise the RR balance overstates unrealised gains.

Bare-Act text Para 41 (Transfer of revaluation surplus to retained earnings) · AS 10 (Revised 2016) – Property, Plant and Equipment · click to expand

The revaluation surplus included in equity in respect of an item of property, plant and equipment may be transferred directly to retained earnings when the asset is derecognised. This may involve transferring the whole of the surplus when the asset is retired or disposed of. However, some of the surplus may be transferred as the asset is used by an entity. In such a case, the amount of the surplus transferred would be the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the asset's original cost. Transfers from revaluation surplus to retained earnings are not made through profit or loss.

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AS 10 – Transfer of Revaluation Reserve (Mandatory and Optional/Excess Depreciation)

Worked example

⚠️ Common exam mistakes