What it means
The concept matters because historical cost, the price you actually paid, tells you nothing about what an asset is worth now. A warehouse bought for $1,200,000 fifteen years ago may be worth $3,000,000 today, while specialised machinery may be worth a fraction of its cost the moment it is installed.
For traded assets the calculation is simple, because the market publishes a price. Multiply the quantity held by the latest quoted price and you have the current market value, which is why investment statements can be updated daily with no judgement involved.
For assets that do not trade continuously, value has to be estimated, and the method depends on the asset. Property is typically appraised using recent comparable sales, a business using multiples of earnings or discounted cash flow, and used equipment using auction or dealer evidence for similar items.
Current market value drives real decisions rather than just reporting. Lenders set borrowing limits against it, insurers price cover on it, buyers and sellers negotiate around it, and accounting standards require certain assets to be carried at fair value with movements running through the accounts.
The main nuance is that a market value assumes an orderly sale. A forced or rapid disposal usually achieves considerably less, which is why lenders apply a discount to appraised values when calculating what they will lend against an asset.
In practice
Real-world examples.
Example
A manufacturer refinancing its premises commissions a valuation that returns a current market value of $4,600,000 against a book value of $2,100,000. The bank lends 65% of the market value, giving a facility of $2,990,000 that the book figure would never have supported.
Example
An insurance broker reviews a client's plant cover and finds the equipment insured at original cost from nine years ago. Replacement values have risen substantially, so the client is underinsured and would recover far less than the cost of getting back to work after a fire.
Example
A family business preparing for a sale gets an indicative valuation at 5.5 times adjusted operating profit of $1,400,000, giving a current market value near $7,700,000. The owners use the figure to plan tax and succession rather than to set a firm asking price.
Formula
Calculation
For a holding of identical units the calculation is:
Current Market Value = Number of units x Current market price per unit
Tessaro Holdings owns 12,000 shares in a listed engineering company. The shares closed today at $48.25.
Current Market Value = 12,000 x $48.25 = $579,000
The shares were bought three years ago at $35.00 each, so the cost basis is 12,000 x $35.00 = $420,000.
Unrealised gain = $579,000 - $420,000 = $159,000
As a percentage of cost that is $159,000 / $420,000 = 37.9%. The gain is unrealised, meaning it exists only on paper until the shares are sold, and it would change with tomorrow's price. If Tessaro carries the holding at fair value, the $159,000 already sits in its accounts even though not a single share has been sold.Case study
Seen in the real world.
This is an illustrative and fictional example. Coldbrook Logistics, an invented haulage business, carried a fleet of 40 vehicles in its accounts at written-down book value of $2,800,000 after several years of depreciation. When the directors explored selling part of the fleet to fund a depot, they assumed the sale would raise something close to that figure.
A dealer assessment came back with a current market value of $3,650,000, because a shortage of good used vehicles had pushed second-hand prices well above the depreciation schedule the accountant had applied years earlier. Book value had followed an accounting policy, while market value followed actual demand, and the two had drifted apart by roughly 30%.
Coldbrook sold 14 vehicles for $1,310,000 against a book value of $980,000, recording a gain on disposal of $330,000, and it also increased its insured values to match replacement cost. The finance director's conclusion was blunt: the accounts had been correct under the rules and badly misleading as a guide to what the company owned.
Watch out
Common mistakes.
- Assuming book value and market value are the same. Book value follows a depreciation policy chosen years ago, while market value follows what buyers will pay today, and there is no reason for them to agree.
- Quoting a market value without a date. Prices move, so a valuation is only meaningful as at a specific day and set of market conditions.
- Expecting to achieve full market value in a fast sale. A distressed or accelerated disposal typically realises a substantial discount, which is why lenders apply a haircut to appraised figures.
Questions
People also ask.
How often should assets be revalued?
Traded investments effectively revalue daily, while property and plant are usually reviewed every one to five years or whenever a lending, insurance or sale decision depends on the figure.
Is market value the same as fair value?
They are close and often used interchangeably, though fair value is an accounting term with a specific definition that can be applied even where no active market exists.
Why do two valuers give different answers?
Valuation involves judgement about comparables, assumptions and the purpose of the exercise, so a range of a few percentage points between competent professionals is normal rather than a sign of error.
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