Assets Valuation
Financial Accounting
BAF-2A
Definition of “Asset
Valuation”
• Asset valuation is the process of determining
the fair value of an asset.
• Asset valuation helps in decisions related to
“investment”, “mergers & acquisition”,
“taxation” and “accounting processes”.
• Selection of methods of “asset valuation”
depends on type of asset and purpose of
valuation.
IFRS 13: Fair Value
Measurement
• Under IFRS 13, Fair Value Measurement, the fair value
of an asset is the price that would be received to sell
the asset in an orderly transaction between market
participants.
• Where more than one market exists for the asset then
attempts should be made to identify the principal
market for the asset.
• Definition of Fair Value: Fair value is defined as the
price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction
between market participants at the measurement date.
• IFRS 13 applies to all assets and liabilities measured
or disclosed at fair value, except for specific
exclusions such as share-based payment transactions
(IFRS 2) and leasing transactions (IFRS 16).
Common Methods of Asset
Valuation
• Market Value Method:
• The price which an asset will fetch from the open market.
Current price in the open market is used for asset
valuation.
• Example:
• A company wants to purchase a new warehouse to expand its
operations. The goal is to determine the market value of the
warehouse they are considering.
a. Identify Comparable Warehouses
b. Evaluate the Warehouse Being Considered
c. Adjust for Differences
d. Determine the Market Value
Common Methods of Asset
Valuation
• Income Approach: Calculate the PV of future
expected Cash Flows generated by use of the asset.
• A company is considering purchasing a piece of
specialized equipment for its production line.
a. Estimate future cash flows
b. Determine the discount rate
c. Calculate the Present Value of cash flows
d. Sum all the Present Values
Common Methods of Asset
Valuation
• Cost Approach: Estimates the value based on the
cost of creating or replacing the asset, adjusted
for depreciation or obsolescence.
• A manufacturing company needs to determine the
value of a custom-built industrial machine it
owns. The machine has been in use for five years,
and the company plans to sell it or insure it.
a. Determine Replacement or Reproduction Cost
b. Subtract Depreciation
c. Asset Valuation:
• Value of asset = Replacement Cost - Depreciation
Common Methods of Asset
Valuation
• Comparable Sales Approach: Uses the sale prices of
similar assets to estimate value.
• A retail company is considering purchasing a
warehouse to expand its operations. To determine
the fair value of the warehouse, they use the
Comparable Sales Approach, comparing recent sales
of similar warehouses in the area.
• Identify Comparable Properties
• Adjust for Differences
• Calculate the Average Adjusted Value
Common Methods of Asset
Valuation
• Book Value (Net Asset Value): The value recorded
on a company's balance sheet, typically the
original purchase price minus accumulated
depreciation.
• A company is preparing its financial statements
and needs to determine the book value of a
manufacturing machine that has been in use for
three years.
a. Determine the Original Purchase Price
b. Calculate Accumulated Depreciation
c. Calculate the Book Value
