Asset valuation is an essential financial process used to determine the fair market value assigned to a specific asset. Assets may be tangible or intangible and can include plant and machinery, IT equipment, buildings and land, vehicles, stocks, investments, intellectual property, goodwill and more.
Value is assigned using a range of calculation methods and consists of both subjective and objective measurements.
Asset valuation services are carried out for a variety of purposes, from standard tax reporting to financial audits to merger and acquisition activity.
As the name suggests, tangible assets refer to actual physical assets. Generally they are used in the daily operations of the business and are often required to produce the company’s goods or to deliver the company’s services. Tangible assets can be fixed or current.
Fixed assets, also known as hard assets, include things like buildings, land, vehicles and plant and machinery. They are depreciated over a period of time and cannot be easily converted into cash.
Current assets, or liquid assets, can be easily converted into cash and are generally only held by the business for a short period of time. Current assets include cash, stock inventory and short-term investments. Since current assets can be easily converted into cash, they provide liquidity to a business and reduce risk.
Tangible assets can be used as collateral security to obtain loans.
The ATO provides guidelines on valuation for real property, plant and equipment and other tangible assets.
Intangible assets, on the other hand, are non-monetary assets without physical substance. They are generally considered long-term assets that will generate a return for the company in the future.
Identifiable intangible assets include things like intellectual property, patents, copyrights, logos, trademarks, brand recognition and other non-physical assets.
Unidentifiable intangible assets are those things that cannot be sold or separated from the company, like goodwill, branding and reputation. The most common unidentifiable intangible asset is goodwill. Government grants may also be classed as an intangible asset.
While fixed assets, like buildings or machinery, are fairly easy to value, intangible assets like goodwill or intellectual property can be much harder to measure and are often based on subjective assessments.
Intangible assets can be valued using the following approaches:
- Market approach — Based on market evidence of what third parties have paid for comparable assets
- Income approach — Assumes that the value of an asset is the present value of future earnings from the asset
- Cost approach — Based on estimating the costs of constructing or acquiring a replacement intangible asset
Why is Asset Valuation Important?
Asset valuation is extremely important for any company for a range of reasons.
Companies need to pay taxes on any assets that they own. The only way to accurately calculate the amount of tax due is to ensure that all assets are properly valued. The ATO provides guidelines for taxpayers and valuers for determining the market value of assets.
Asset valuation is necessary to determine the right price for an asset. This is particularly important if an asset is being bought or sold and is necessary for both the buyer and the seller.
Mergers and acquisitions
For mergers and acquisitions, asset valuation is required to provide a clear picture of the size and value of the business and comparison between assets and liabilities.
Large assets can be valued based on their earning potential. Valuation helps businesses to determine how their assets can benefit their cash flow.
Assets can be used as collateral for loan applications. In this case, asset valuation is required so the lender can determine the loan amount that can be secured by the assets.
Companies, especially large or public companies, are subject to a large amount of financial oversight. They need to be regularly audited for transparency and to ensure adherence to financial regulations. Part of the audit process involves verifying the value of assets.
To make sure your business is being properly valued, talk to an experienced valuer today.