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

YES, I agree with the statement that the source of gap between book value and market value is due to both tangible and intangible assets.

EVIDENCE: As per current accounting standards, Fixed Assets are valued at depreciated value i.e. original cost less depreciation accumulated over the years, Current Assets like accounts receivable is valued at net realisable value, Inventory is valued at cost or net realisable value whichever is less, Intangible Assets e.g. trademarks, patents, copyrights etc, if they are acquired assets with an identifiable value and useful lifespan, are valued at cost less accumulated amortization. None of the above represent the market value of the asset. As per accounting principles, valuation of assets at market value is not allowed with a few exceptions like trading securities which are valued at fair price. A majority of assets like fixed assets, current assets, inventory, accounts receivable and intangible assets are not valued at market price. This results in the gap between the book value and market value of assets. The end user is not aware about the market value and the decision of the end user is based on available information in financial statements which do not project the current picture.