Appreciation

16 Sep, 2023

Appreciation refers to the increase in the value of an asset over time due to various factors such as inflation or increased demand. It is observed in various fields including economics, finance, and accounting, affecting a wide range of assets like real estate, company stocks, and currencies. This concept is the opposite of depreciation, which involves a decrease in asset value over time. The rate of appreciation can be calculated using a method similar to determining the compound annual growth rate of assets.

What Is Appreciation?

Appreciation refers to an increase or rise in the value of assets over time.
Such a hike in the value of assets can be possible for various reasons, such as a hike in the demand and supply chain or there is inflation in the market.
Appreciation is reciprocal to depreciation, in which there is a decrease in the value of assets over time.

Key Points

Appreciation is an increase in the value of assets over time.
Appreciation is just the opposite of depreciation, where an asset’s value decreases over time.
Appreciation rate can also be defined as when an asset’s value of goods or services grows within the market.
Depreciation rate can be defined as the rate at which any asset value of goods or services declines in the market over time.
Capital appreciation refers to an increase in the value of assets like the appreciation of company stocks and bonds of an investor, value increase in land valuation or other rising value of assets.
Meanwhile, currency appreciation defines a hike in one country’s currency with respect to the currency of other countries in the foreign exchange market.

Understanding Appreciation

Generally, appreciation defines an increase or hike in the value of any assets within the market. Appreciation is widely applicable in economics, finance and accounting areas.
Appreciation in accounting refers to a positive adjustment with the initially booked value of an asset. Further, accountants categorise this concept in accounts like The new value of any asset must be higher than its depreciable cost; asset value increases due to applied market forces, and an increase in the value of assets is not a mere result of its improving or adding something with the assets.
Within finance, the term appreciation refers to an essential concept that the possibility of an increase in asset value over time motivates and enhances the investor to make an investment or purchase, such as hike value assets in order to make profits, etc.
Appreciation can easily impact several kinds of assets, including financial, currencies and real estate. Appreciation can be possible with both tangible as well as intangible assets. Suppose a company’s trade mark can increase due to its higher recognition of brand value among customers or clients.

Existing Factors Behind the Appreciation

Existing various reasons behind the appreciation, hike or increase in the value of any assets, such as if there is an increasing demand for assets, if there is a reduced supply of assets in the market terms limited in nature, in case inflation occurs in the market and if there are any changes sought with the interest rate within the market.

How Appreciation Works in the Market

Appreciation refers to an increase in any kind of asset, such as a company’s stocks, investor’s bonds or real estate.
Capital appreciation refers to an increase in financial asset value like a stock, which can increase if there is an improvement in the company’s financial conditions.
The value of any assets has increased, but it does not mean that the owner of the said assets has realised the increase in value. In case the owner of the said assets re-values the asset on the basis of financial statements for a high price, then it will represent a realisation of the increase.
Currency appreciation is also a kind of appreciation if a country’s value increases or decreases over time in relation to other existing currency values of other countries in a foreign exchange rate.

Fact– The profit or earnings after selling out an asset that has appreciated its original value is referred to as a Capital gain.

Method to Calculate the Appreciation Rate

The appreciation rate of any asset is believed to be virtually the same as the compound annual growth rate of assets. Therefore, in order to calculate the value, you must choose the ending value of an asset and divide it by the beginning value of the asset. Further, take the result to 1 dividend by holding the duration of assets (years). Finally, you need to subtract 1 from the result to obtain the result.
It simply means to find out the appreciation rate of any asset, you must know the asset’s appreciation value along with the future value. You must acknowledge how long the appreciation of such an asset might be possible.

Appreciation vs. Depreciation

The appreciation is reciprocal to deprecation, an increase in the value of any assets over a period of time.
Existing assets in the world will either depreciate or appreciate their value. Moreover, assets, like machinery or any equipment, will lose their appreciation value and tend towards depreciating value daily after getting used for some duration. While few assets like financial assets and real estate asset will appreciate their value instead of depreciating the value.
Usually, depreciation occurs when an asset loses its economic value by use, while appreciation is possible when there is a hike in asset value. For example- assets, including trademarks, get an upward hike or rise in value as brand recognition increases among customers.