Question

 Why isn’t the value of an asset adjusted as the market value of that asset changes?

Answer 1

Valuation of an asset as per books of account is primarily defined by GAAP, which states the measurement basis for different types of asset. Some types of assets, typcall financial instruments, are fair valued, i.e. their values are continuously updated in the balance sheet to reflect the fair market value of the asset. This is because typically, financial instruments will be eventually settled in cash, therefore, the balance sheet value should reflect the value that the entity will derive if the asset is settled on the balance sheet date.

However, for many other types of assets, like inventory, property, plant and equipment, intangible assets, the value of such assets is expected to be recoverable through use of assets rather the immediate sale. Therefore, it does not make sense to change the calues of these assets to market value, as the market value is in no way, an indicator of what benefits the entity will realise from the asset. Therefore, the value of an asset is not always adjusted when the market value of the asset changes