DEFINITION of Appraisal Capital
Appraisal capital is a form of accounting adjustment. Appraisal capital is created when the appraised value of a company's net assets exceeds its book value. The difference between the two values is then debited against the actual asset and then credited to an equity account belonging to the stockholders. Appraisal capital is quite rarely seen in the United States and is much more commonly utilized in other countries as a form of write-up. The excess value created by the appraisal is what creates the actual capital involved.
BREAKING DOWN Appraisal Capital
Appraisal capital is an accounting adjustment used when the appraised value of a company's assets turns out to be greater than its book value. Appraised value is an evaluation of a property's or asset's value based on a professional evaluation at a given point in time. The evaluation is performed by a professional appraiser, and is often used when a company is put up for sale, or when a company is forced into liquidation, for example in the case of aa bankruptcy judgment. Book value, on the other hand, is an accounting value that is essentially the net asset value (NAV) of a company, calculated as total assets less intangible assets (e.g. patents, goodwill) and total liabilities. Book value may be shown as net or gross of expenses such as trading costs, sales taxes, service charges and so on.
The appraised value is thus an evaluation where a professional appraiser inspects the assets and property of a company and comes to a valuation, while the book value is arrived at as an accounting number. Their appraised value may be higher than the book value, since book value does not account for the market price of certain assets that may trade at a premium to their book value. Thus, to reconcile the accounting figures in such a case so-called appraisal capital is entered as a plug in figure to bring the book value in line with the difference.
In the United States, firms, accountants, and regulators do not often use appraisal capital, and instead favor net present value (NPV) for determining the accounting value of the market premium over book value. This is because appraised values may in fact differ from market price or the liquidation price of a certain asset on a company's balance sheet. Also, different appraisers may come to different appraised values for the same asset, causing some ambiguity.