Appreciation

By:

James Knight

James is a lead editor for Invezz, where he covers topics from across the financial world, from the stock… read more.

Updated: Aug 20, 2021

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In general commercial usage this is an accounting term relating to the increase in value of an asset, particularly a fixed asset. In this sense it is the reverse of depreciation, which measures the fall in value of fixed assets over their normal lifetime.

In times of high inflation appreciation will be common to all balance sheet assets. Even current assets, such as stock, will increase in nominal value whilst held in store. Generally, the term is reserved for property or, more specifically, land and buildings. In any viable modern economy, such property tends to increase in value over the years – if only because the scarcity of usable land forces up its price in a competitive situation. jedless to say there are considerable difficulties in assessing the increase in value of any particular asset. This is principally because of the variety of interpretations that can be attached to the word ‘value’ itself. For reasons of expedience rather than logic. the valuation to be put on land and buildings belonging to a company is normally left to the discretion of the directors of the company – subject to the watchful eye of the auditors. The necessity of such an exercise in valuation, though dictated by common sense, was first underlined by the Companics Act 1967. This act imposed on the directors the duty of expressing an opinion on the present market value of any land or interest in land contained in the fixed assets shown in the balance sheet, and of drawing attention to any significant increase (despite the fact that no specific figure could be honestly supplied regarding the extent of such increment). The purpose of this provision in the Act was partly to protect members against the unscrupulous entrepreneur, who, with private knowledge of the high asset value of companies which is not, however, reflected in current hare prices, might seek to buy their shares indulge in asset stripping.

Reference: The Penguin Business Dictionary, 3rd edt.