Q: The value of land will increase over time. Does that mean you can never adjust the value of land upward?
A: That is correct. In this instance, Fresno Properties can never increase the value of land it initially recorded at $831,018 on its balance sheet. If it did so, it would violate the Conservatism Rule, which states that the historical cost of $831,108 can only be adjusted downward and not upward.
In most instances, land value does increase over time. That becomes important to a lender if it wished to take land as collateral in a lending transaction. In such an event, the lender would likely engage an outside professional to estimate the market value of the land, which it would use in deciding if it wished to require this asset as collateral backing for the lending transaction. The appraiser’s estimate of market value and the recorded value on the company’s books may differ quite substantially.
Course overview: Critical Accounting Principles and Assumptions and More Debits and Credits