What is Asset Valuation?

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  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 18 May 2020
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Asset valuation is a procedure in which the value of an asset is determined. This is done in order to confirm that the value is reported accurately and appropriately on balance sheets. If assets are not valued properly, it can create a skewed value in accounting documents which can in turn lead to failure on an accounting audit, problems with tax liability, and other issues.

In some cases, assets are relatively easy to value. For example, if a company holds stock in another company, it can look at the current trading price of that stock at set intervals for the purpose of an asset valuation. Likewise, assets such as bonds and other securities can be valued because they have publicly listed and reliable values.

There may be other types of assets which have more unique and dependent valuations. In these cases, asset valuation becomes more complicated. Intangible assets such as copyrights, for example, are difficult to assign value to. Likewise, assets such as real estate require an evaluation of comparable real estate and current market conditions in order to arrive an accurate and reliable valuation which reflects the fair market value of the asset in question.

If assets are overvalued, a company may appear to be worth more than it is in its public reportings. Undervalued assets, on the other hand, set a company up for a abnormally low value and can create problems with tax liability because tax authorities may determine that the assets are undervalued and recalculate a company's tax due in light of this information. Repeated errors on asset valuation can also bring up suspicions of fraud, rather than innocent errors.

Finding the current worth of an asset may require the assistance of someone who specializes in asset valuation. These financial professionals can review the documentation associated with an asset, examine the asset itself if necessary, and use their experience along with standard accounting practices to arrive at an accurate, current, and fair value for an asset.

This process is especially critical in cases where companies are preparing to make an initial public offering or are negotiating with other companies in an acquisition or merger deal. In these cases, scrupulous evaluation of company assets and the value of the company as a whole is an important part of the deal. This information may also be reviewed and audited by regulators and government officials for the purpose of confirming that it is correct.

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Post 2

@indemnifyme - Excellent point.

I think hiring an asset valuation specialist is a good idea when a company is having trouble assigning value to their assets. It's probably even a good idea when the company doesn't think they're having trouble with this.

Asset valuation sounds like it's not an area where any business should mess around. The potential problems sound much too great!

Post 1

When assets are undervalued it can create a problem with insurance as well. Most insurance policies insure something for a certain amount of money. For instance most homeowners policies give a certain amount of money for liability and a certain amount for personal property. The same goes for business insurance.

If the assets of the business are undervalued the business may not purchase enough insurance. Then in the event of a loss once everything is appraised by the insurance company the insurance policy may not cover the amount the assets are really worth. This could be extremely damaging for a company.

Companies should definitely make every effort to ensure that their asset and property valuation is correct. This will allow them to adequately protect themselves in case of a loss.

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