Appraisal Capital

What Is Appraisal Capital?

In accounting, appraisal capital is an entry on a company's balance sheet. Appraisal capital is created when the appraised value of a company's net assets exceeds its book value. When this situation occurs, the company's book value is listed as its actual value. The difference between the two values is then debited against the actual asset and credited to an equity account belonging to the stockholders.

Appraisal capital is quite rarely seen in the United States and is much more commonly utilized in other countries as a form of write-up. The excess value created by the appraisal is what creates the actual capital involved.

Appraised Value vs. Book Value

The appraised value is an evaluation of a property's or asset's value based on a professional evaluation at a given point in time. The evaluation is performed by a professional appraiser and is often used when a company is put up for sale, or when a company is forced into liquidation (for example, in the case of a bankruptcy judgment).

Book value, on the other hand, is an accounting value that is the net asset value (NAV) of a company. It is calculated as total assets less intangible assets (e.g. patents, goodwill) and total liabilities. Book value may be shown as net or gross of expenses — such as trading costs, sales taxes, service charges, and so on.

In order to achieve a company's appraised value, an evaluation with a professional appraiser is required. A professional appraiser inspects the assets and property of a company and comes to a valuation. The book value of a company is arrived at as an accounting number. The appraised value may be higher than the book value because book value does not account for the market price of certain assets that may trade at a premium to their book value. Thus, to reconcile the accounting figures in such a case, appraisal capital is entered as a plug-in figure to bring the book value in line with the difference.

In the United States, firms, accountants, and regulators do not often use appraisal capital. Instead, they favor the net present value (NPV) for determining the accounting value of the market premium over book value. This is because appraised values may in fact differ from market price or the liquidation price of a certain asset on a company's balance sheet. Also, different appraisers may come to different appraised values for the same asset, causing some ambiguity.