value is the accounting value of a company and often has little relationship to market value of an asset. It is a term generally accepted accounting principal (GAAP), which reflects the value of the net US dollar to which the historical cost of the assets are recorded in the financial statements of a company and represents the price paid for an asset less accumulated amortization. book value or amortized cost are other terms that the financial community will use to refer to the book value.
fair market value (FMV) is the standard most widely recognized and accepted value for the transfer of assets in the acquisition of business and sales. The definition of ASA FMV is "the value at which the property would change hands between a willing seller and a willing buyer when neither is acting under duress and when both have reasonable knowledge of the relevant facts." * The concept of FMV refers to the value which should be anticipated a transfer of assets to occur in the existing conditions at the time and date of a business valuation.
The simplest way to describe the two values is to understand that value is the depreciated value of what has been paid for a particular activity while the market value is the current price at which the asset can be purchased on the market.
The fixed assets such as machinery, equipment, buildings and vehicles that are expected to last for more than one year may be written off as an expense on the income statement based on annualized cost use of these assets. From an accounting perspective, depreciation transfers a component of the cost of the asset from the balance sheet P & L for each year of the expected life of the asset. There are a variety of depreciation methods that meet the GAAP standard and are typically grouped into two classes: (1) the straight line (2) accelerated. The fact that many owners choose an accelerated method to reduce their short-term tax liabilities adds additional confusion when assessing balance sheet values.
For example, suppose a company has purchased a piece of machinery or a vehicle for $ 50,000 that had an expected life of five years. If the owner decided to use straight-line depreciation, the carrying amount is reduced by $ 10,000 for each of the 5 years. If you opted for an accelerated method, like double declining balance, the carrying amount is reduced by $ 20,000 the first year. In each of these cases, the "book" value of the property will be different and will not have an impact on the "market value", since there is absolutely no way to calculate the market value of a business asset by a budget.
According to the IRS, there is no simple formula to derive FMV. Depending on the type of activity, there are many methods and industry resources used for valuables, like "blue books" for automobiles. The original value of an item can also be irrelevant especially when you consider that a variety of activities have appreciated in value during the same period that the CPA is their stable. This will ensure that some activities are listed in the balance sheet at a fraction of their value FMV. replacement cost is another indicator of FMV but also this process can not have a direct relationship with the true value assets. When the FMV is in question, the recommended approach is to engage a professional firm specializing in the evaluation of each single activity classifications.
* ASA Business Valuation Standards (Herndon, VA: American Society of Appraisers, 1997), p. 20.
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