The Valuation of Assets

The valuation of assets

The key to an understanding of the manner in which the accountant approaches the problem of valuation is to be found in the classification of assets. Fixed assets are long-term assets whose usefulness in the operations of the firm is likely to extend beyond one accounting period. They are not intended for resale, so that their value depends upon the future cash flows which they are intended to generate. By contrast, current assets are those assets which are intended to be exhausted in the income-earning operations of the next accounting period, and this includes their availability for meeting current liabilities.

There are three general rules for valuing fixed assets:

(a) The enterprise should be considered as a going concern, unless the facts indicate to the contrary. This means that the valuation of fixed assets should reflect the continued expectation of their usefulness to the enterprise. For this reason, their realizable value is inappropriate, and their historical cost is regarded as the most objective measure of value. Historical cost includes the original purchase price and, in addition, all other costs incurred in rendering the asset ready for use. In Part 3 we shall see that it may be argued that historical cost does not value a firm as a going concern.

(b) Changes in the market value of fixed assets are traditionally ignored in the valuation process.

(c) Depreciation in value attributable to wear and tear should always be recognized.

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Read on: Reporting Recorded Assets and Liabilities

Reporting recorded assets and liabilities

The purpose of this webpage is to examine further the logic and the methodology which underlie the traditional manner in which assets and liabilities are recorded and depicted on the balance sheet. First, we discuss the conventional historical cost valuation of assets and the implications of this method of valuation for balance sheet purposes. Second, we discuss the adjustments to historical cost values which are made at the stage of preparing the balance sheet. Third, we review the implications of the variety of different results obtained from traditional... see: Reporting Recorded Assets and Liabilities