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Hello,
My question is that what is the reason of transferring excess depreciation from revaluation surplus to retained earnings? Why companies do this? What is the benefit of doing it for a company while it is not compulsory?
Thanks in advance.
As you will know from my free lectures, the revaluation reserve is a capital reserve and therefore cannot be distributed as dividend.
Transferring the excess depreciation to retained earnings means it then does become distributable as dividend.
It is only really relevant for companies if they do want to pay bigger dividends than they otherwise could. If they intend to pay lower dividends anyway then there is no point in making the transfer.
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But how a company use this amount to pay as a dividend as it is not regonised as profit?
I think revaluation surplus is just profit we can see in numbers not real cash actually in our hand until we sold it. Then if we don’t have any cash from revaluation surplus how it can be used as payemt for dividend?
Cash is needed to pay dividends and the cash will generate cash from all sorts of places – selling goods, disposing of assets etc..
However by law the most they are allowed to pay out as dividend is the amount in retained earnings. By transferring the excess depreciation to retained earnings they are allowed to pay more dividend. That does not mean they will pay more dividend – that depends on how much cash they have available, it just means they are allowed by law to pay more.
Have you watched my free lectures on this? The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
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