In simple financial terms, appreciation is defined as an increase in the value of an investment occurring over a period time. There are different types and sources of this increase in value, and multiple ways in which it is measured, such as by rate of increase, the amount, or in comparison to expected gains.
In the corporate world, accountants track changes in the value of a company’s investments closely, due to the suddenness and the frequency with which such values in modern assets can change. While most assets in a company’s books depreciate over time, such as the value of a well-used machine, some assets — such as brand trademarks — experience regular increases. Meanwhile, said growth must be recognized, if it is to be of any value in further financial decision-making.
The following list includes five different types of appreciation, each of which figures prominently in today’s financial market. Accountants learn about all five during their academic careers, even if they subsequently specialize in a subset thereof.
There are different types of assets which appreciate gradually, if more or less reliably. These include real estate, precious metals, precious stones, and government bonds. Such investments will usually be denoted by individual terminology relating specifically to the asset in question, but they lend themselves to similar defining characteristics. Unlike investment opportunities, such as those found in the trading of stocks on the open market, these types of assets appreciate both more reliably and more slowly. They are usually purchased with the understanding that their value will grow, as opposed to this being up to chance, but that growth requires enabling factors: time, restoration, or refinement (as with the carving and polishing of precious stones) being common examples.
In both the financial and the accounting scenes, the concept of capital appreciation is largely the same. It refers to the increase in value of specific financial assets, most often stocks. When an enterprise increases in value, its stockholders, including other corporate interests, see the value of their shares in that enterprise increase. This is not to be confused with “capital gains,” which represents the net profit earned from the sale of such an investment after it has appreciated.
Many companies, even small businesses, do business with enterprises across international boundaries. This has become more common than ever in the digital age, and it requires close monitoring of relative currency values. Depending upon a country’s economic strength, its value may increase or decrease relative to that of other countries. This isn’t a strict comparison, with a single meter; instead, it is an intricate web of relative values, as the rate of change between any two given countries might not be matched by that of any other two countries. When the Euro was first introduced, each was worth about US $1.17. During the US recession of 2008, the value of the dollar decreased, and the Euro was worth about $1.60. Today, with the European Union’s escalating financial woes, it’s worth about $1.10. More dramatically, when Bitcoin first appeared, they had a virtually non-defined value, but were initially traded at up to 10 per dollar; today, with widely reported increases and decreases in value, each Bitcoin is worth almost $1,310.
It is difficulty to quantify the specific value of an employee’s skills financially, but vitally important that accountants do so, as it relates directly into how a company should regard (and further enhance) its highly trained employees’ skill sets. By determining values related to an employee’s training and abilities, and quantifying the increase in that value based on additional training and experience, a company can come to a decision on how much that employee is worth to them, how to promote them, and at what level to compensate them for their services.
A trademarked IP, such as a brand name or a product line, may experience both sudden spikes and gradual increases in value. This happens as a name becomes more well-known, often due to marketing campaigns. It is important to track such changes in an asset’s value; this helps to establish the budget for future advertising, as well as providing a benchmark for cases of trademark infringement. In such cases, it is important to be able to identify the before-and-after value of a property, that appropriate damages may be calculated.
Growth analysis is one of the most important skills in an accountant’s portfolio. By tracking the appreciation of corporate assets, a client can help steer the direction of the company toward more profitable ventures, while ensuring the most efficient management and investment strategies for the company’s assets. Without reliable strategies for tracking and analyzing the growing worth of valuable assets, a company risks making potentially devastating business decisions, which can lead to the loss of large amounts of money and, in some cases, thousands of jobs.