Schweser says in the notes that An upward revaluation of assets will increase assets and stockholders’ equity. It will decrease leverage ratios and increase profitability in the period the revaluation occurs. How exactly does a reevaluation increase profitability it the revaluation period? Can not find this in the CFA material. It does however say that a reversal of a revaluation goes through income.
I think they’re talking about a revaluation of a previously impaired asset. The reversal of previously recognized impairment flows through net income, and therefore increases profitability.
Just adding to beatthecfa’s comments. Since it is accounting, you can take it as mathematics. 1. Go by basic equation A = L + E. 2. After revaluation, value of your Asset (A) has gone up. 3. In order to balance your equation, you either have to increase L or E. 4. There is no case for increase in L here, so it is logical your Equity (E) will increase. 5. Now E could increase either thru increase in Net Income (NI) or by increasing your ‘Other Comprehensive Income’ component. 6. Since, increase in Asset value after revaluation is not a case/component for ‘Other Comprehensive Income’, your increase in Equity has to come from NI/Profitability from Income Statement for that Period. 7. So, any revaluation of your Asset will affect your Profitability for that period. Upward evaluation to be reported as a Gain and Impairment to be reported as a Loss in your Income Statement for that period.
Need to refine your statement rus, All upward revaluations increase equity, but not all upward revaluations increase profitability. An increase in value of a previously impaired asset flows through net income and increases equity. An increase in value of an asset that has never been impaired flows directly to equity. It does not flow through net income. Bonus info: A decrease in value of an asset that was previously revalued upwards first flows directly through equity to the extent of the previous revaluation.
U.S GAAP only allows revaluations for assets held-for-sale. I also need to point out that when I say flow directly to equity it is usually through the revaluation surplus, not other comprehensive income. I do not think IFRS uses other comprehsive income at all. I’ll have to recheck that though.
As you mentioned: “An increase in value of an asset that has never been impaired flows directly to equity. It does not flow through net income.” Thank you for correcting me, beatthecfa.