The revaluation of fixed assets is normally done on the basis of revised conditions and life or usable value of assets. According standard 10 states that in case of increase in value of assets on the revaluation of fixed is normally credited directly to owner’s interests under the heading of revaluation reserves and is regarded as not available for distribution”.

Thus, creation of revaluation reserves does not result into any cash inflows and represents unrealized gains. However, brought forward losses are in the nature of revenue losses. As a matter of prudence, revenue losses can be adjusted against revenue reserves only and not the capital reserves. Therefore, the accounting treatment followed by the entity is not correct and the auditor should qualify the audit report by mentioning the above fact.