Is the net book value of fixed assets in the balance sheet represens or equal to its current “market value”?

October 31st, 2010 Comments off
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Some would presume that the value of a fixed asset in the balance sheet namely:

(a)    Cost less accumulated depreciation; or at

(b)   Revalued amount less accumulated depreciation

Is equal to or represent its current “market value”

The answer  is that generally the net book value of a fixed asset is NOT necessarily remotely similar to the amount for which the business could sell of the fixed asset to a would-be purchaser.

Say, a business bought a machine for $50,000 and expects it to have a five year life and no residual value, it might depreciate the machine by (20% x$50,000)=$10,000 per annum. After one year, the net book value of the machine would be $40,000 ( $50,000-$10,000).  Note that the market selling price might be say $45,000. This DOES NOT MATTER since it is not the purpose of depreciation to reduce the balance sheet net book value of an asset to its potential sell-off price.

However, it is important to note that based on prudence concept whenever the net book value is SIGNIFICANTLY higher than its current “market” value or “realizable amount” the asset should be written down to this lower value at once.

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Financial Accounting

 
 

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