Could you elaborate on this?

Question

What I would like to know is if an asset is booked at its historical cost, and it's depreciated using the life of the asset, (the historical cost, and projected salvage value at the end of useful life), then why is the "net book value" of property, plant, and equipment not equal to current fair market value?

Answer 1

The nbv of an asset may be far off from the fair market value for a host of reasons. For e.g. you may have an antique watch that's 100 yrs old and it's probably been depreciated to 0 value long ago but it can be worth a fortune now. Same with vintage cars. Or you could have paid 100k for a house that was in a very peaceful area and you think its estimated useful life would be 50yrs but then the govt decides to build a highway right next to your house and the value can collapse overnight. Or you could have bought a Pentium 4 computer thinking it would last you 3 yrs but right after you bought it, out comes a new fantastic model and noone would want your P4 computer unless it's for free. So as you can see, lots of factors you never thought of at the time you bought the asset can affect its future fair market value.

That's why altho you're allowed to account for fixed assets at cost less accumulated depreciation, you are supposed to test for impairment if any indication of impairment exists. If indeed the value of the asset has been impaired, you're supposed to recognise the impairment. (I'm assuming you're an accounting student)