Dear Robert O:
It is you that has the thing backwards. Assets are listed at the price bought. Big items actually get their own line in the Asset Section. Each line item has a corresponding line called Depreciation of whatever the asset is titled. For Fabs, this line is zero until the fab is in production. Many others have stated this fact, I am not the only one. Once started, the company expenses part of that asset according to the relevant depreciation schedule allowed by the government. The depreciation line is credited with the asset's depreciation it is connected to for the period. Unfortunately for many companies especially in semiconductor manufacturing, that depreciation schedule does not reflect reality and is longer than what actually happens in the real world. Thus over time after a fab is in production, company cars being driven, processing equipment in use, and any other asset that depreciates over time. IP and the amount over book value of an acquired company are other assets that are depreciated. All of those depreciation transactions also debit other stockholders equity line in the capital section keeping the balance sheet in balance. Thus the net worth of the company shrinks by the amount depreciated, sometimes referred to as the "book" value.
Now GAAP has some adjustments they wish to do to the process of reporting asset values. Those assets not depreciated, need to kept at current market valuations. Thus, unrealized gains or losses must be reported as if they were realized (you could probably put a line right next to the asset line to keep them separate if you wanted). The other is to include stock options (vastly used to blatantly under report employee costs) at current costs as well. This is a biggie for most semiconductor companies. It helped over report earnings in many companies but, the dot coms were most aggregeous at this practice. One other rule being worked on was how to handle acquisitions more evenly across the board. The last form I heard was to require the amount paid over book for the acquired company to be immediately expensed. This would remove the double taxation (it could actually be triply taxed but, I do not know tax law all that well to be sure) that goes on currently.
The government has a vested interest in keeping asset values high because, companies are thus over taxed due to reduced expenses (increased before tax profits). This bias thus also over reports the value of assets in most companies, Intel and AMD included. Liabilities are biased as being under valued as well (for obvious reasons). Thus, book value is over valued based on current conditions for the vast majority of companies.
Sorry to be pessimistic. But book value is the most you could expect if someone confiscated that company and paid you market valuations for those assets (plant and equipment). It would actually be less in most cases.
Pete |
