Market value stands for the price you can acquire when you sell an asset in a market that is open and competitive. On the other hand, an asset’s book value is the cost you spent when you purchase it initially, and you need to make adjustments for any successive alterations, for example, depreciation or impairment (Also see Difference between Impairment and Depreciation). The probability of having a discrepancy between market value and book value is always high, as people would calculate the former according to the varying demand and supply of an asset (Also see Fair Value Accounting). In contrast, the latter is a historical cost that one has recorded when he purchases the asset.
As an instance, a firm has spent RM125,000 on purchasing a truck (Also see FRS 16 Property, plant and equipment). Then, it records RM25,000 as the depreciation for that truck. Hence, it now possesses RM100,000 as its net book value. If that firm sells the truck at RM115,000, which is its current market price, it will be recording RM15,000 as a gain from that sale.
As you can see from the example above, you can recognise the discrepancy between market value and book value when you sell an asset. The market price is the price that one would sell an asset, whereas the cost of goods sold stands for its net book value. Unless you want to sell an asset, you do not have to figure out the difference in value among its market value as well as book value.
There is one scenario where a firm can recognise the alterations in the assets’ value, that is for the marketable securities in the category of trading securities (Also see The Relationship Between Accounting and Economics). It is a must for a firm to constantly record the holding gain as well as holding losses on the securities if it is holding them. Under such a condition, the market value and book value will be the same.
When there is a substantial difference between the market value and book value, determining the value of a firm can be challenging as it needs to undergo the process of appraisal. This is to enable the firm to make adjustments on the asset’s book value to its market value.
In certain conditions, the fixed assets’ market value may surpass book value significantly. An instance of such a scenario is when there is a higher demand for office buildings, which causes their market value to increase substantially. When such a condition happens, the GAAP will never recognise the gain in the accounting records of that firm. Nevertheless, the IFRS allows that particular firm to carry out revaluation.
If handling accounting tasks which are related to the assets is challenging for you, you may consider hiring an accounting firm in Johor to get assistance. Therefore, you can save yourself from being buried in piles of accounting-related chores and have more time and energy to manage your core tasks.