Appreciation (Value) – Definition

Cite this article as:"Appreciation (Value) – Definition," in The Business Professor, updated September 5, 2019, last accessed June 5, 2020, https://thebusinessprofessor.com/lesson/appreciation-value-definition/.

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Appreciation Definition

Appreciation refers to an increase in an asset over time. Appreciation occurs due to different reasons, including an increase in demand or fluctuation and growth of interest rates. Appreciation is the opposite of depreciation; which refers to a decrease of an asset (mostly works on liabilities like vehicles) over time.

In accounting, appreciation refers to an upward movement of a company’s asset value in their accounting books. Appreciation in company assets is mostly related to trademark, which is as a result of brand appreciation. On the other hand, depreciation occurs more often as using fixed machinery reduces their value.

PS: Assets which are said to appreciate are called paper gains since they have not being sold, and the increase only applies in the company book. However, when sold, they become realized gains after being taxed.

A Little More on What is Appreciation

Appreciation reflects an increase in the value of assets like estate properties, government bonds, and national currency. An increase in the monetary value of a company’s share is known as capital appreciation, and it is mostly a by-product of the increased performance of that firm. At the point of appreciation, asset owners do not immediately receive the increase, as it only becomes visible when he or she revalues the properties at a higher price. The profit realized from selling an asset which has increased in value is called a capital gain.

On the other side, when the value of a country’s currency increases, it is called currency appreciation. An example would be when the Euro was worth $1.17 in 1999 and later increased to $1.60 in nine years. In this case, we can say that the Euro appreciated against the USD in 2008, while the USD depreciated in that same year.

However, using the current exchange rate of $1.10 per Euro, we can say that the USD appreciated against the Euro, while the Euro depreciated before the USD.

Important Details

  • Appreciation refers to an increase win the value of an asset
  • When financial asset increase over time, it is called a capital appreciation
  • When a national currency increases over time, it is called currency appreciation

Understanding the Difference between Appreciation and Depreciation

Assets are given to appreciation and depreciation. While some might appreciate, others are entirely doomed to depreciate. An example would be a normal car worth $50000. Over time, the worth of the car would reduce to almost $30000, especially when newer models are created.

Properties like stocks or financial assets, on the other hand, are kept with the hope of appreciating. In general fashion, electronics and other physical items lose value over time.

Illustration of a Capital Appreciation

Assume that an investor purchased a real estate property for $500,000 and gave it out for rental at $25,000 per year. After a period of ten years, industrialization increased in that area, and many big names decided to find settle in the region. Now, the cost of houses has increased by over 110% during this period, and so has rent. In this case, we can say that the investor gains an extra $27,500 from rent (new cost becomes $52,500) annually. In a case where he or she decides to sell that property off, assuming that the building is not worth more than the 110% increase, then he’d gain $550,000 (new price becomes $1,050,000) before tax. In this case, we can say that the return has increased in terms of rent and cost; thus, this property has appreciated.

Illustration of Currency Appreciation

In 1981, the Chinese Yuan appreciated against the U.S. dollar till it reached its peak at 8.28 yuan per dollar in 2005. Even with this increase, the USD was well valued, and as such more investors were producing goods at a cheaper cost. Sales were also strong and competitive around the world due to the cheap labor and production cost. However, in the later period of 2005, the Yuan increased by another 33% against the USD.

Reference for “Appreciation”

https://www.investopedia.com/terms/a/appreciation.asp

https://financial-dictionary.thefreedictionary.com/appreciation

https://corporatefinanceinstitute.com › Resources › Knowledge › Other

www.financialdictionary.net › Investing

https://investinganswers.com/financial-dictionary/investing/appreciation-1107

Academics research “Appreciation”

Effects of RMB Appreciation on the Chinese Macro-economy [J], Weixian, W. (2006). Effects of RMB Appreciation on the Chinese Macro-economy [J]. Economic Research Journal4, 47-57. A Computable General Equilibrium (CGE) is constructed to evaluate quantitatively the impact of the revaluation of Chinese Renminbi (RMB) on China’s economy.The result indicated that the effect of appreciating RMB on the real growth rate of the GDP is not linear,but increase like quasi-exponent form.The simulation result of the impact on the Chinese export and import is consistent with the simple intuitionistic judgement; it has an adverse effect on the employment and the decrease increment in employment is up with the appreciating currency extent; its impact on the consumption of urban and rural households is quite different,and it will increase the consumption gap of the two kinds of households; its effects on industrial sectors are quite different as well.The general conclusion in this study is that large appreciation of RMB currency is quite disadvantage on China’s macro-economy,the small revaluation is acceptable in the meaning of its effect on socio-economy,as a result,it will be wise to widen the change interval of RMB exchange rate in order to alleviate the pressure of RMB appreciation.

RMB Exchange Rate: Appreciation and Cost-Benefit Analysis [J], Shuguang, Z. (2005). RMB Exchange Rate: Appreciation and Cost-Benefit Analysis [J]. Economic Research Journal5. Having reviewed the fluctuation of RMB exchange rate since China’s economic refo rmation, this paper discusses the short run and long run pressure on RMB exchang e rate appreciation, the former accounted for by the economic disequilibrium in domestic and international and the lasting double favorable balance and the latt er by productivity improvement and economic competitiveness increasing. The auth or argues that macroeconomic disequilibrium is exhibited by bilateral circulation and dependence of real and monetary economy. Then the paper measures FDI functio n, imports exports function and the elasticity of exchange rate, estimates the cost of appreciation on variable range, which includes scalar of FDI, decrease of export and decrease of GDP employment. The paper finds that the effect of a ppreciation drop half in three quarter and nearly disappear in seven quarter. Ac cordingly, policy advice is put forward with regarding to the space of appreciat ion and operate manner.

Anti-inflation with RMB Appreciation: A Practical Dilemma [J], Chengsi, Z. (2009). Anti-inflation with RMB Appreciation: A Practical Dilemma [J]. Studies of International Finance5.

Local market and national components in house price appreciation, Gyourko, J., & Voith, R. (1992). Local market and national components in house price appreciation. Journal of Urban Economics32(1), 52-69. We analyze real home price appreciation using a long time series (1971–1989) and large cross section (56 metro areas). Our findings yield important new insights into two outstanding issues in real estate finance and economics. The first deals with the implications for investment opportunities in housing across metro areas. A striking result is that we cannot reject the null hypothesis of equal appreciation rates across locales. A priori, the results are suggestive of equal expected appreciation across the different local markets. However, it is noteworthy that we find significant serial correlation in some local appreciation series. This is consistent with previous findings by Case and Shiller [6]and suggests that prescient market timers might have been able to make money in selective markets. We then consider the potential implications of equal appreciation rates across cities for housing market equilibrium in light of the fact that price levels do materially differ across metro areas. We argue that equal real appreciation rates starting from different price levels imply increasingly divergent prices of local traits in terms of foregone consumption. Without special assumptions with respect to income and productivity differentials across locations or to local trait income elasticities of demand, the appreciation rates in high housing price level areas ultimately have to fall below those in low price level areas. Preliminary evidence indicates that higher priced areas tend to have significantly lower appreciation rates (controlling for local fixed effects and a common, time-varying effect).

Macaulay’s duration: An appreciation, Weil, R. L. (1973). Macaulay’s duration: An appreciation. The Journal of Business46(4), 589-592.

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