Quote:
Originally Posted by Kevin J
I'm wondering if someone could answer a quick question...
I was looking over some balance sheets for companies and noticed that the value of one company's property/real estate seemed way too low for what they own. I mentioned this to a friend who told me that the amount listed on the balance sheet is what the company paid for the real estate and does not include appreciated value. EX: A company purchased a piece of land in 1984 for $500k. Today that land is worth $1M. However, it is still listed on the balance sheet as $500k.
I guess my first question is, where is this $500k in appreciation shown? My friend said, it isn't. If this is true, wouldn't it mean the actual book value is off and there is an additional $500k available if the company were to liquidate tomorrow?
Companies write off depreciating assets for tax purposes. Don't they need to show appreciation on their books even if they are not subject to tax?
Sorry if this is a dumb question. I'm trying to learn how to evaluate a company for investing purposes and obv have a long way to go. I'd appreciate any help. Thanks.
This answer relates to US accounting; Euro may/probably does have different rules.
(a) Land is carried at historical cost
(b) Land Improvements (parking lot, landscaping) and Buildings are carried at cost minus an assumed depreciation.
(c) "Don't they need to show appreciation..." No. The assumption is that the asset will be used in the normal course of business to generate revenues and income. The assumption is NOT that they are buying and selling long term business assets (land, building, machinery) in order to "flip" them for a profit.
There are opportunities in rare circumstances where the market value of these fixed assets should be considered. For example, if a company were to be acquired by another solely for the liquidation of its assets, the market value would be considered. Also possible that if a company (i.e. railroad) owned the mineral rights to a large expanse of property, these mineral rights might be carried at little/no balance sheet value but have significant value.
Without very intense study, it might be difficult for a distant investor to properly value these fixed assets. For example, what is the value of the property owned by JCPenney? More than B/S value? Less? Tough call.
Good luck to all