Asset Valuation

Hello Everyone,

We talked about assets recognition criteria earlier. Now we will talk about asset valuation i.e. determination of the value of capital assets or fixed assets, the value at which they should be shown in their owner's balance sheet.

As we categorized the assets previously into different categories, we can conveniently value them as per their category.

• First there were long term assets; the valuation is done at historical cost, adjusted for any estimated gain and loss in value from improvements and the aging, respectively, of these assets.
• Next, we have short terms assets, also called current assets; they are mostly recorded at the market value.
• Then comes, investments and marketable securities; Debt investments and equity investments recorded using the cost method are classified as trading securities, available‐for‐sale securities, or, in the case of debt investments, held‐to‐maturity securities

Available‐for‐sale securities are also valued at fair market value. Any resulting gain or loss is recorded to an unrealized gain and loss account that is reported as a separate line item in the stockholders' equity section of the balance sheet. The gains and losses for available‐for‐sale securities are not reported on the income statement until the securities are sold. Unlike trading securities that will be sold in the near future, there is a longer time before available‐for‐sale securities will be sold, and therefore, greater potential exists for changes in the fair market value   

So this was the valuation of assets based on their category. Now let’s have a quick walkthrough on the some terms that are used widely for valuation.

Fair market value (FMV) is an estimate of the market value of a property, based on what a knowledgeable, willing, and unpressured buyer would probably pay to a knowledgeable, willing, and unpressured seller in the market.

Fair value is an estimate of a security's worth on the open market. There is no one way to calculate the fair value for a security, but calculations typically take into account future growth rates, profit margins, and risk factors, among other items.

Intrinsic Value is value of asset that may be subject to personal opinion of an analyst and vary among analysts.

Book Value is recorded cost less accumulated depreciation.

So, this was all about today’s note. Stay good! :)

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And in the end there is a message to me that I am not accepting so far

I’m sorry for all misdeeds
This is wrong because it has affected rather ruined you badly
In the future, I will be careful not doing like thi
Will you forgive please me? :(

Recognition Criteria of Assets

Hi Everyone,

We talked about key component of Balance Sheet earlier. 

Let’s talk about the criteria for Assets Recognition this time. Let’s first define what an asset is

“Asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity (IASB Framework).”

How do we recognize an asset, to qualify its inclusion to the balance sheet? 

• When expenditure is made, it can either be either recognized as an expense or an asset. The primary criterion for asset recognition is that the expenditure will result in economic benefits flowing to the owner in future reporting periods. The asset is then charged to expense over the expected number of periods during which economic benefits will be realized. (Land is one exception in this case, it has indefinite life)

• There must be an objective way to measure the asset. The purchase price of a fixed asset is an objective measurement, since the buyer is expending a specific amount of funds. However, it is not possible to objectively measure an internally-generated intangible asset, such as the value of customer relationships. Thus, given the difficulty of measurement, this type of asset cannot be recognized as an asset unless it relates to an acquisition, in which case a portion of the purchase price is allocated to the intangible assets of the acquirer.

• Another criterion for asset recognition is the materiality of the expenditure. Asset tracking is time-consuming, and so is to be avoided from a clerical perspective. A business typically imposes a threshold, below which all expenditures are charged to expense, in order to reduce the number of its asset records. For example, a business sets its "cap limit" at $2,500, which means that all laptops purchased are charged to expense, even though they will clearly provide benefits over the next few years

Here is a diagrammatic illustration on how we can recognize an element as an asset 

  This is was a little explanation on the criteria for asset recognition. Feel free to contact for any related query. Have a good day! :)

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And in the end there is a message to me that I am not accepting so far

I’m sorry for all misdeeds
This is wrong because it has affected rather ruined you badly
In the future, I will be careful not doing like thi
Will you forgive please me? :(