Appreciation definition

What is Appreciation?

Appreciation is an increase in the value of an asset over time. This is one of the main reasons why investors hold certain assets, such as common stock, real estate, rare coins, and artwork. Investors are more likely to hold assets for which there is either a history or an expectation of value appreciation.

Why Does Appreciation Occur?

There are a number of reasons why assets can appreciate. For example, the supply of an asset may become restricted, perhaps because of border controls, or because the number of parties creating the asset have declined. Or, the demand for an asset may increase, perhaps because of legal requirements. A third option is that the inflation rate may increase, though the resulting appreciation may in fact be depreciation when the increase is adjusted for inflation.

The Difference Between Appreciation and Depreciation

Appreciation is an increase in the value of an asset, while depreciation is a decrease in the value of an asset. The key differences between the concepts are as follows:

• Allowability within accounting frameworks. Asset appreciation may be recognized within the IFRS framework, but not the GAAP framework. Conversely, asset depreciation is usually mandated within both of these frameworks.

• Causes. Asset appreciation is triggered by increasing levels of demand or decreasing supply, while depreciation is triggered by asset wear and tear.

• Tax treatment. Asset appreciation may be taxed at the capital gains rate when an asset is sold, while depreciation reduces taxable income.