Why is Asset Valuation Important?
Asset valuation is an accounting process used to determine the appropriate value of an asset. Valuation is important for all kinds of assets including tangible assets like buildings and equipment and intangible assets like brands, patents and goodwill.
There is a range of valuation techniques used to determine an asset’s value. Some of these include the cost method and standard cost method, market value method, absolute value, relative value and more.
Valuation often depends on the prevailing market conditions. That means that the value of assets, and in turn the value of the company, can change depending on shifts in market prices, demand attitude and so on. Therefore, regular asset valuation is essential for a variety of reasons.
Companies need to pay taxes on all assets that they own. Professional and accurate asset valuation ensures that all assets are properly valued and that companies are paying the right amount of tax. If assets are overvalued, a company could be paying more in tax than they need to. Conversely, if assets are undervalued, a company could be paying less tax than they should, and may end up incurring penalties down the road. The ATO provides guidelines for taxpayers and valuers for determining the market value of assets.
Determining the right price is essential when you’re looking to buy or sell an asset. Professional and independent asset valuers can work out a fair market price for an asset that will be beneficial for the buyer and seller.
Insurance valuation is vital to ensure that a business is appropriately covered in case of loss or damage. In simple terms the purpose of having insurance is to put the insured back in the position they were in prior to a partial or total loss occurring. Accurate valuation is required to determine the amount a company needs to be insured for.
A correct valuation of assets ensures that you are appropriately covered in case of a loss event, that you won’t face out-of-pocket expenses due to being underinsured and that you aren’t exposed to unnecessary risk. Accurate valuation can also help to minimise insurance costs by making sure you aren’t over-insured. It can also help to streamline the claims process in the case of loss or damage.
A company can use its assets as collateral when applying for loans. However, before a bank will approve the loan, the assets must be professionally valued to ensure that they provide adequate security for the loan.
Financial transparency is important for large or public companies. A crucial aspect of financial oversight is auditing. The valuation of assets is a central part of any audit process and is used to ensure the company is correctly reporting and representing its assets, as well as paying the correct tax and adhering to financial reporting and regulation.
Mergers and Acquisitions
When it comes to mergers and acquisitions, valuation is required to provide a clear picture of the size and value of the business and comparison between assets and liabilities. Accurately valuation can be important for raising equity capital, to issue new shares or to list or float on an exchange.
Large assets can be valued based on their earning potential. Valuation helps businesses to determine how their assets can benefit their cash flow.