when considering a firm’s assets and
liabilities we should also talk about how these values are recorded in a
company’s balance sheet are they recorded at the price at which they are
acquired or are they recorded at their market price there can be a significant
difference between the two think of a firm’s fixed assets let’s imagine that
the firm owns office spaces in Paris these office spaces were acquired 20
years ago and in order to acquire them the company paid five million dollars
given the rapid growth of the real estate market and the fact that
properties in large metropolitan cities became even more valuable we shouldn’t
be surprised that the offices that were acquired for five million dollars long
ago are worth north of thirty-five million dollars today so how should the
firm record this asset on its balance sheet should it use the historical cost
of five million dollars or it’s fair value the assets market price today
which is equal to thirty five million dollars well companies are allowed to
choose between the two methods however they have to be consistent
they can’t switch from one set of rules to the other more than once and once
they choose a method they have to apply it to all assets in the same category so
let’s say that the company that owns office spaces in Paris
decides to apply the fair value method to its office in Paris it will then be
required to use the fair value method for all the lands and buildings it owns
it can’t choose which assets will be recorded at fair value and which assets
won’t be recorded at fair value please note that the estimation of fair value
is a rather complicated topic usually companies hire an expert who provides a
valuation of the asset he is able to determine the fair value of the asset by
looking at transactions of comparable assets on the market fair value
accounting is not allowed for all categories of assets and liabilities it
is most often used for the following types of assets and liabilities real
estate brand value trademarks other fixed and intangible assets debts
pensions these are the rules regulating how assets and liabilities are recorded
in a company’s balance sheet thanks for watching