What is asset valuation and its purpose?

The definition of assets

As a company, corporation, or individual, the importance of assets goes beyond owning – it provides expectation for a future benefit. These benefits include generating cash flow, reduce expenses, or financial growth and capital growth.

For example, an individual may own a property and in hopes the price will surge in the next few years to generate capital growth and possibly capital return. Likewise a company with lands, buildings, or machines would generate more sales and improved cash flows, and capital growth on the lands.

On top of that for companies or corporations, assets represents an economic resource.

Most common ones are; tangible assets and intangible assets.

1. Tangible assets – economic resources with physical presence. Like structures, machinery or land.
2. Intangible assets – economic resources without physical presence. Like trademarks, copyrights, and patents.

These are the examples of assets for companies that will in turn determine their net asset value, after deducting liabilities. Therefore, the need of assets for both individuals and companies are vital to ensure financial growth and future benefit.

Asset vs liabilities

Compared to assets, liabilities do not have a future benefit. A liability is something that is owed to or obligated to someone else. It can be real (e.g. a bill that needs to be paid) or potential (e.g. a possible lawsuit). For example, debt and mortgages. Hence, if you find yourself with more liabilities than assets, you may be on the cusp of going out of business.

What is asset valuation and its purpose?

Asset valuation refers to the process of determining the market or present value of assets. Mainly used to calculate the value of a company’s assets, both tangible and intangible.

Therefore, is it necessary for companies to undergo asset valuation exercise to support their financial reporting requirements. In addition, it also provides the opportunity to update the asset values in their book and accounting.

Asset valuation can be carried out using multiple methods such as discounted cash flow analysis, option pricing models or comparable method. In turn, companies have to firstly figure out their tangible and intangible assets. Later on a team of valuers will assist them in calculating the total value of assets.

Once the final figure has been accounted, the total assets will be deducted by the value of liabilities of a company to figure out the net value. An example for asset valuation:

Company A
Total assets: $300 billion
Intangible assets: $5 billion
Liabilities: $78 billion

Total net asset value: $217 billion (total assets $300 billion – total intangible assets $5 billion – total liabilities $78 billion)

If you would like to know more on asset valuation, we at Irhamy International Valuers will be delighted to assist you to calculate your company’s asset value!

Real Estate Valuation & Consulting for small and medium enterprises: IVI Global