What is Asset Valuation?
Asset valuation simply pertains to the value assigned to a specific property, including stocks, options, bonds, buildings, machinery, or land that is conducted usually when a company or asset is to be sold, insured, or taken over. The assets may be categorized into tangible and intangible assets, but basically, valuations can be done on either an asset or a liability such as bonds issued by a company.
Valuing Tangible Assets
Tangible assets refer to a company’s assets that are physical, or that can be seen, which have been purchased by an organization to produce its products or goods or to provide the services that it offers. Tangible assets can either be fixed such as structures, land, and machinery, or current such as cash.
Other examples of such type of assets are company vehicles, IT equipment, investments, payments, and on-hand stocks, as well as confirmed orders.
To compute for the value of a tangible asset;
- The company needs to look at its balance sheet and identify which are the tangible and intangible assets.
- From the total assets, deduct the total value of the intangible assets.
- From what is left, deduct further the total value of the liabilities and what is left are the tangible assets.
Consider the following simple example:
- Balance sheet total assets: $5 million
- Total intangible assets: $1.5 million
- Total liabilities: $1 million
- Total tangible assets: $2.5 million
In the example above, the total asset of Company ABC is $5 million. When the total intangible assets of $1.5 million are deducted, that leaves $3.5 million. After the total liabilities are deducted, which is another $1 million, only $2.5 million are left, which is the total value of the tangible assets.
Valuing Intangible Assets
Intangible assets are assets that take no physical form and are often just felt or known not only by the organization but by the market as well. They may include patents, logos, franchises, and trademarks.
Say, for example, a multinational company with an asset of $15 billion goes bankrupt one day, and none of its tangible assets is left. It can still get up because of its intangible assets like its logo and patents that many investors and other companies will definitely go after.
To learn more, check out CFI’s Business Valuation Modeling course.
Methods of Asset Valuation
Valuation of fixed assets can be done using various methods, which include the following:
1. Cost Method
The cost method is the easiest way of asset valuation which is done by basing the value on the price for which the asset was bought.
2. Market Value Method
The market value method bases the value of the asset on its market price or its price when sold in the open market. However, in the absence of the same nature of the asset in the open market, the replacement value method or the net realizable value is used.
3. Base Stock Method
The base stock method requires a company to keep a certain level of stocks whose value is assessed based on the value of a base stock.
4. Standard Cost Method
The standard cost method uses expected costs instead of actual costs, often based on the company’s past experience. The costs are obtained by recording differences between these two costs.
To learn more, check out CFI’s Business Valuation Modeling course.
Importance of Asset Valuation
Asset valuation is one of the most important things that need to be done by companies and organizations. There are many reasons for valuing assets, including the following:
1. Right Price
Asset valuation helps identify the right price for an asset, especially when it is offered to be bought or sold. It is beneficial to both the buyer and the seller because the former won’t need to pay more than the asset’s value nor will the latter be paid less than the asset’s value.
2. Taxes
Every individual or organization that owns a property or asset needs to pay taxes for their assets. By doing asset valuation, taxes are calculated accurately.
3. Company Merger
In the event that two companies are merging or if a company is to be taken over, asset valuation is important because it helps both parties size up the business.
4. Loan Application
When a company applies for a loan, the bank or financial institution will need collateral just in case of a debt default. Asset valuation is needed because the banks determine the loanable amount based on the process.
5. Audit
Companies, especially public ones, are regulated, which means they need to present financial audits and reports for transparency.
To learn more, check out CFI’s Business Valuation Modeling course.
Related Readings
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:
