FAIR MARKET VALUE

RESEARCH PROPOSAL

Executive Summary

Fair market value of an asset tends to determine the price of an asset that is based on its current value, however book value also known as the carrying value or depreciated cost is a term which is determined by the Generally Accepted Accounting Principles that states the value of an asset should be depreciated over its useful life, it is the amount that should be recorded at the balance sheet and later this depreciation can then be transferred to the profit and loss account as an expense. It is significant to differentiate between the two terms as both of have certain benefits and costs associated to it. Yet the advantages of recording asset in the statements at the book value overweigh the benefits of fair market value since it shows a more transparent picture of the value of an asset.

Fair Market Value

Introduction

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 its useful life. (Fekkes, 2010). I believe book value is a better measure for valuation of an asset, since the value of assets decline over time due to being used over time and as a result of wear and tear. And also as fair market value is volatile and fluctuates over time it would be difficult to determine the value at which the asset should be recorded in the financial statements (Olima, 2004).

Thesis Statement

“Since the fair market value tends to fluctuate over time, it does not takes into consideration the impact of wear and tear on an asset, therefore using book value for asset valuation is a better approach”.

Advantages of Fair Market Value

Fair market value tends to show more transparent picture of the value of an asset. It is the current market value, even while selling an asset the asset is sold at its fair market (Thomason, 2012). Using the fair market value of an asset in the financial statements of business ...