Fair Market Value

Fair Market Value

Introduction

GAAP are the standards and accounting principles that are used to determine the recording and summarizing accountant information. It provides accountants with a complete framework that should be used while recording accounting and financial information. According to the rules and standards of GAAP an enterprise should record the value of its long-term assets at its book value in its balance sheet and not at its fair market value (Needles, Powers, & Crosson, 2010). Book value under GAAP is defined as the value of an asset which can be calculated by deducting the accumulated depreciation from the cost at which the asset was purchased; depreciation is deducted from the cost as the value of an asset tends to decline over its useful life. The value of long-term asset depreciates due to wear and tear. Wear and tear in accounting term is used to explain that tangible assets deteriorate over time as they are used. Wear and tear would not only occur due to usage of an asset, however wear and tear can also be due to obsolescence of an asset. Wear and tear will also occur even if an asset is used by the company with care and proper maintenance, thus it is significant for enterprises to depreciate their assets over time, since long-term assets have a useful life of more than 1 year thus their value is tend to decline over time (Fekkes, 2010).

As explained under GAAP fair market value is not an effective measure for recording the value of an asset in the books of company, since the market value fluctuates it will be difficult for the company to determine the value at which the asset should be recorded. Therefore to avoid the uncertainty of determining the value at which the asset should be recorded according to the standards of GAAP suggests recording the value of long-term assets at its book value (www.bmioa.com). I believe it is appropriate for the companies to use the book value of an asset while recording the value in its books of accounts, since the market value is volatile therefore making it difficult for companies to determine the accurate price of an asset at which it should be recorded. Simultaneously book value is an effective measure for determining the value of an asset at which it should be recorded in the books of company, as asset value declines over time due to deterioration and being used over time. According to GAAP fair market value of an asset can be defined as the value or price of an asset at which it can be bought or sold, however book value under GAAP is defined as the value at which an asset is recorded in the balance sheet, it is the undepreciated value of the asset (Dick & Piera, 2010). According to the principles of GAAP asset should be recorded at the book value in the balance as the asset should be depreciated since the value of the asset tends to decline over ...