What is asset appreciation?
Asset appreciation, also known as capital appreciation, refers to an increase in the value or price of an asset over time.
Put in other words, asset appreciation is the difference between the value at which an asset was acquired in the past and its current value.
The term ‘appreciation’ is widely used in disciplines such as finance, accounting, and economics (including the appreciation of currencies).
Asset appreciation is the opposite of the depreciation[1] of assets, which is what occurs when assets lose value over their useful life until their values reach zero or become obsolete or negligible.
Types of assets affected by appreciation
Appreciation can have an impact on different types of assets, such as:
- Financial assets such as shares of companies, bonds, and mutual funds.
- Physical assets like land, real property, and commodities.
- Tangible assets such as a company’s trademarks.
Currencies, although not an asset in the real sense of the word, is also affected by appreciation.
Reasons why assets appreciate
There are a number of reasons for assets to appreciate, meaning to increase in value over a period of time. Some of the reasons are:
- The supply of an asset is reduced.
- Increased demand for the asset.
- The effect of inflation.
- Changes in interest rates as a result of adjustments made by central banks of countries.
- The improved financial performance of a company.
Appreciation in accounting
In accounting, appreciation refers to an upward adjustment made to the book value of an asset as initially recorded in a company’s accounting records.
In addition, accountants apply certain criteria to determine whether an asset has appreciated in value. The criteria are, inter alia:
- The value of an asset increases because of some market or economic conditions.
- The new value of an asset is more than its depreciable cost.
(The depreciable cost of an asset is the cost of an asset that can be depreciated over a certain period of time. Depreciable cost is equal to the acquisition and installation costs, minus its estimated salvage value at the end of its useful life.)
- The appreciation in the asset’s value does not originate from improvements or additions to the asset.
Difference between appreciation and gain
The Cambridge Dictionary defines the word ‘gain’, amongst other definitions, as: ‘to increase in weight, speed, height, or amount.’ (Accentuation by the article writer.)
Both the terms appreciation and gain are associated with an increase in the value of an asset. However, not all gains in the value of an asset qualify as appreciation.
An increase in the value of an asset qualifies as appreciation when a company realises the increase. The reporting of the revaluation of an asset at its increased price on a company’s financial statements represents the realisation of the increase.
Contrarily, a gain is not a realised increase in the value of the asset. When an asset with an increased value is sold, a business acknowledges a gain.
How to record appreciation in the accounting system of a business
International Accounting Standard (IAS) 16 requires that under the revaluation model ‘revaluations should be carried regularly so that the carrying amount of an asset does not differ materially from its fair value at the balance sheet date’ (IAS 16.31).
If a revaluation results in an appreciation in the value of an asset, the increased amount of an asset is debited to the particular asset account.
Simultaneously, an equity account (separate from capital), called ‘revaluation surplus’, needs to be created. The amount of the appreciation should be credited to the ‘revaluation surplus’, account until is sold or otherwise disposed of.
Appreciation is not considered a normal gain. Therefore, it should not be recorded on the income statement of a business.
The appreciation rate
What is the appreciation rate?
The appreciation rate refers to the rate at which an asset grows in value.
- Regarding assets, the appreciation rate is the rate at which the values of assets, such as financial assets (shares, bonds) and physical assets (property, commodities) increase.
- Concerning currencies, the appreciation rate refers to the rate at which the value of one currency increases relative to another currency in the forex market.
Calculation of the appreciation rate
The following steps show how the appreciation rate of an asset can be calculated:
- Subtract the initial value from the final value.
- Divide the answer of step 1 by the initial value.
- Multiply the answer of step 2 by 100.
Example:
Justin purchased a home for R1 000 000 in 2016. In 2025, the value of the home has increased to R1 250 000. The rate of appreciation of Justin’s home will be calculated as follows:
R1 250 000 – R1 000 000
= R250 000
= R250 000/R1 000 000
= 0.25 x 100
= 25%
To obtain a more realistic picture of how much the value of Justin’s house has increased from 2016 to 2025, the compound annual growth rate (CAGR) can be used.
The formula to calculate the CAGR is:
[(Final value/Initial value) ^ (1/N) – 1]
Where:
N = number of periods
Example:
Taking the same figures in the example above, the CAGR of Justin’s house will be calculated as follows:
[(R1 250 000/R1 000 000) ^ (1/5) – 1]
= 0.046 x 100
= 4.6%
Currency appreciation
Currency appreciation occurs when the value of one currency increases in relation to another currency.
There can be a number of reasons for the appreciation of a currency, such as interest rates and trade balances of a country, and government policy.
Example of currency appreciation:
When the GBP/USD exchange rate increases from 1.35 to 1.40, it means the British pound has appreciated by $0.05 against the US dollar. A buyer of British pounds will now need $1.40 to buy one British pound instead of $1.35.
[1] See the article, ‘Depreciation in Accounting Explained for Dummies’, for a detailed explanation of depreciation.
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