Appraisal Capital
Categories: Company Valuation, Tax, Real Estate, Insurance
OK, you bought a junker car that doesn’t run. You bought it for $75. Your mechanic appraised it as being actually worth $100. The difference of $25 will get neatly noted in your 1980s-style notebook (you’ve been watching way too much Stranger Things).
In company context, you've acquired an asset...like $5 million worth of Grid A 5 gig DRAM processors. They're a volatile asset. Their value goes up and down quickly in the marketplace. The government regulates Taiwan's DRAM plant imports into the U.S. and prices spike. Those processors that you paid $5 million for now have a market value of $8 million.
To arrive at a fair appraisal value (or "Net Value"), you have to adjust the line item to reflect "greater of book or market value" when you record the new numbers and you’ll subtract the book value from the appraisal value. The entry reflecting the gain against book value, on your balance sheet, shall henceforth be known as "appraisal capital." It will become equity.
Until Russia comes online, supplanting the Taiwanese units and market prices crash. Then you have to redo everything. Keeps accountants employed.
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Finance: What is the Difference Between ...42061 Views
finance a la shmoop. what's the difference between market value and book
value? ever tried to sell sunscreen to a white Walker? yeah [zombie walks through snow]
probably won't make much money. want to know why? now learning about the
difference between market value and book value will tell it all. first market
value it's what the market thinks a stock or a bond or a home or a used car
or whatever is worth. the market the crowd the crazy people.
all right here's an example of market value gone wild in the 17th century [crowd then tulip pictured]
Denmark, they valued a single tulip at 10 grand and it didn't even give them a
triple espresso buzz. go figure. but that's how the market of buyers
valued that tulip so that's what that tulips market value was. that's what the
market said it was worth. Book value however is a completely different in a [man walks through art gallery]
somewhat more rational animal .book value is the dollar amount that a company can
point to which reflects an asset they physically own. imagine buying a tractor
factory for 80 million bucks. it depreciates in value 10 million dollars
a year for 4 years then depreciates that 2 million dollars a year after that. so
after five years that factories Book value ie the amount we're guessing its [chart showing depreciation]
value as actually being is 38 million dollars. but lo and behold the factory
itself is made of Valyrian steel .you know that stuff from Game of Thrones
that kills White Walkers. so after eight years and one white Walker invasion of
Chicago later you decide to sell the factory itself because well the stuff [zombies walk in front of skyscrapers]
it's built out of, that rare material, is suddenly worth a lot more than the
factory .now after eight years the book value of the factory might be 32 million
dollars, but some bitter on eBay of tractor companies offers you a hundred
million bucks! and you accept! that hundred million dollars was the market [man sits behind computer screen]
value of the tractor factory even though the book value said it was worth a whole
lot less. securities actually work the same way. they are traded regularly in a
market place and they reflect their market value even though the book value
at which they are held is often a lot less. and what about Chicago well let's [smiling man carries bags of cash]
just say no one's selling much sunscreen these days.