Property, plant and equipment

What are the various methods to determine market value of property, plant and equipment (PP&E) on the balance sheet? My understanding is that they are reported at costs. But with market value you may be able to find hidden assets which can help in determining intrinsic value.

Thanks
Harje

Comments

  • Hi Harje, it depends on they type of accounting approach one takes. Conservative accounting approach(Historical accounting) would report them at cost whereas mark to market approach may report them at their current fair value.
  • Thanks Subir. But if I wanted to find market value of these properties surely a company does regularly valuation their assets, maybe just for the sake of securing loans.
    Would I be able to find this information on the balance sheet, or is it something I have to dig for and estimate ?

    Thanks
    Harje
  • Good question Harje.

    Since it's nearly impossible to find an active market for PPE, it is quite difficult to arrive at the fair value. In my knowledge, there are no third-party companies that do regular valuation of assets. In corporate accounting, it is up to the accountant to determine the fair value of PPE by using different valuation techniques depending on the specific circumstances of the company. You will find this information on the balance sheet of the company. Refer to the footnotes for explanations on how or why (and if) the company revalued/impaired their assets. These values should be accurate as they are subject to audit.

    In Australia, the following 3 approaches are used most widely and are outlined in AASB 13:

    1. Market approach:
    The market approach uses prices and other relevant information
    generated by market transactions involving identical or comparable (ie
    similar) assets, liabilities or a group of assets and liabilities, such as a
    business.

    2. Cost approach:
    The cost approach reflects the amount that would be required currently
    to replace the service capacity of an asset (often referred to as current
    replacement cost).

    3. Income approach:
    The income approach converts future amounts (eg cash flows or
    income and expenses) to a single current (ie discounted) amount.
    When the income approach is used, the fair value measurement reflects
    current market expectations about those future amounts. You can do this by (a) calculating the present values(by factoring in the appropriate risk premium) (b) option pricing models, such as the Black-Scholes-Merton
    formula or a binomial model (i.e a lattice model), that incorporate
    present value techniques and reflect both the time value and the
    intrinsic value of an option and (c) the multi-period excess earnings method, which is used to
    measure the fair value of some intangible assets.

    I hope this helps.
  • Very helpful, thanks Subir!
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