Question

“The growing gap between book and market values risks rendering accounting information irrelevant. Accounting standards must be changed to address this situation”. Indicate whether you think the source of this gap lies mainly with tangible or intangible assets. Do you agree with the statement? Provide evidence to support your view.

Answer 1

The source of gap between book value and market value lies in both tangible and intangible assets.

Yes agree with the statement

Evidence:

As per accounting standards current assets like accounts receivable is valued at net realisable value, inventory is valued at lower of cost or net realisable value; fixed assets are valued at historical cost less the accumulated depreciation, intangible assets like patents, copyrights, trademarks etc are valued at cost less accumulated amortization in books. None of these costs represents the market value of the assets. As per fundamental accounting principles valuation of assets at market value is not permitted except in case of certain assets which are valued at fair value for example: trading securities. But the majority of assets consists of operating assets like accounts receivable or inventory, fixed assets and intangibles. These assets are never valued at market price. Hence there exists the gap between book value and market value of assets. The end user decision on available financial information in financial statements is based on historical or past cost which is not much relevant since the awareness of current market values is very limited.