Appreciation — a growth of value for an asset over the long term. The increase can happen due to various reasons like changing demand, decreasing supply, changes in the interest rate, or inflation. The probability of increasing value for a certain asset makes investors buy it and receive a profit.
In accounting, appreciation is a positive correction of the initial value of an asset. The new value is always higher than a depreciable cost. It increases depending on the economic situation, but the increase in the value isn’t related to the addition of assets.
Types of Appreciation
There are different types of appreciation in the corporate world. They are measured in different ways (amount, rate of increase, comparison to expected gains). Some of these appreciations lose their value due to the passage of time, others become more valuable.
Asset Appreciation — is an addition of value to an asset (precious metal, real estate, government bonds). This process passes gradually or reliably, that’s why the investors use them as long-lived assets.
Capital Appreciation — is an addition to the market price of an investment. When the company increases its value, the value of the shares also does it. Capital appreciation should be distinguished from capital gains (net profit from the appreciated and sold investment).
Currency Appreciation — is an addition to the value of a currency. The most stable currencies are the American dollar, euro, Swiss franc, Japanese yen, and Great Britain pound. In the last few years, investors have started to pay attention to the cryptocurrencies such as Bitcoin, Litecoin, and Ethereum.
Skill Appreciation — is an addition of value for competencies. This definition is related to human resources and human capital. By appreciating the skills of the employee, the company defines the salary for their services.
Trademark Appreciation — is an addition to the value of a trademark. Such a value appears when the company gains a reputation and loyal clients. It is important to monitor these changes because it helps to define the budget for advertising campaigns and the price for a possible sale.
Appreciation and gain
Both these terms are related to the increasing value. However, there is a significant difference between them. Gain is the money received from the sold assets. It is usually reported in the financial statements. In contrast, the appreciation shouldn’t be obligatorily reflected in the financial statements. The exception is provided by the asset’s revaluation. In this case, the company indicates the unrealized gain which equals the unrealized value.