Valuation - Reviewer: Connected Accounting Subjects & Possible Questions with
Answers
🔗 Accounting Subjects Connected to Valuation with Possible Questions & Answers
1. Financial Accounting and Reporting (FAR)
Connection: Valuation is essential in measuring fair value, impairment losses, investment
classification, and property revaluation under PFRS.
Possible Questions & Answers:
● Q: How does IFRS 13 define fair value?
A: IFRS 13 defines fair value 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.
● Q: What valuation techniques are permitted under PFRS 13?
A: PFRS 13 permits three valuation techniques: the market approach, the income
approach, and the cost approach.
● Q: In measuring fair value, which level of the fair value hierarchy applies to a DCF
model?
A: DCF (Discounted Cash Flow) is classified under Level 3 of the fair value hierarchy
because it uses unobservable inputs based on management assumptions.
● Q: How do you determine the value of PPE under the revaluation model?
A: The value is based on the asset's fair value at the date of revaluation, less any
subsequent accumulated depreciation and impairment losses. Revaluation gains are
recognized in OCI.
● Q: How is the value of an investment in equity securities measured?
A: Equity investments are measured at fair value through profit or loss (FVTPL) or, if
irrevocably elected, at fair value through OCI (FVTOCI) under PFRS 9.
2. Advanced Financial Accounting and Reporting (AFAR)
Connection: Used in the context of business combinations, group accounts, goodwill, and
consolidated financial statements.
Possible Questions & Answers:
● Q: How is goodwill measured in a business combination?
A: Goodwill = Consideration transferred + Non-controlling interest + Fair value of
previously held equity interest – Fair value of net identifiable assets acquired.
● Q: What valuation method is used to recognize non-controlling interest at acquisition
date?
A: It can be measured either at fair value (full goodwill method) or at the proportionate
share of net assets (partial goodwill method).
● Q: In a step acquisition, how is the previously held interest remeasured?
A: It is remeasured at fair value at the acquisition date, with any gain or loss recognized
in profit or loss.
● Q: How do you determine the fair value of identifiable net assets acquired?
A: Each asset and liability acquired is measured at fair value based on market
participant assumptions on the acquisition date.
3. Financial Management (FM)
Connection: Core source of valuation techniques such as DCF, WACC, capital budgeting, and
cost of capital models.
Possible Questions & Answers:
● Q: What’s the formula for the DCF model and what are its key inputs?
A: DCF Value = ∑ (Free Cash Flow / (1 + WACC)^t) + Terminal Value / (1 + WACC)^n.
Key inputs: projected cash flows, discount rate (WACC), and terminal value.
● Q: How do you compute the present value of an annuity in a business valuation?
A: PV = PMT × [1 – (1 + r)^-n] / r, where PMT = periodic payment, r = discount rate, n =
number of periods.
● Q: What is the relationship between risk, return, and valuation?
A: Higher risk demands higher return, which increases the discount rate and decreases
valuation. Lower risk increases value due to lower required returns.
● Q: How does the weighted average cost of capital (WACC) affect valuation?
A: WACC is the discount rate used in DCF. A higher WACC decreases present value,
while a lower WACC increases valuation.
4. Cost Accounting and Managerial Accounting
Connection: Relevant to asset-based valuation using cost methods and inventory valuation.
Possible Questions & Answers:
● Q: How do you value inventory under standard costing for valuation purposes?
A: Inventory is valued at standard cost adjusted for variances to reflect net realizable
value if it is lower.
● Q: What cost elements are included in valuing a self-constructed asset?
A: Direct materials, direct labor, and allocated overheads; interest may be capitalized if
the asset qualifies under PAS 23.
5. Auditing
Connection: Auditors evaluate the appropriateness of management’s valuation estimates in
FS.
Possible Questions & Answers:
● Q: What audit procedures are used to test management’s valuation of assets?
A: Inspect valuation models, assess assumptions, recalculate estimates, test inputs,
and compare with external sources.
● Q: What are the risks of material misstatement in fair value estimates?
A: Key risks include management bias, use of unobservable inputs (Level 3), and
significant estimation uncertainty.
6. Regulatory Framework and Legal Environment (Business Law)
Connection: Legal transactions like mergers, acquisitions, or liquidation require valuation to
ensure fairness.
Possible Questions & Answers:
● Q: In a legal merger, what methods are commonly used to value the merging
companies?
A: Common methods include DCF (income approach), Comparable Companies (market
approach), and Net Asset Value (cost approach).
● Q: What is the legal importance of proper valuation in shareholder transactions?
A: Accurate valuation ensures fairness, avoids disputes, and supports compliance with
corporate and tax laws.
🌟 Possible General Questions from Your Professor (with Answers)
● Q: Explain the three main approaches to valuation and give an example where each is
used.
A: Income Approach: DCF used to value a profitable company. Market Approach: Using
P/E ratio of similar public firms. Asset Approach: Using NAV for a holding company.
● Q: How is DCF different from Relative Valuation?
A: DCF derives intrinsic value using projected cash flows and WACC. Relative valuation
compares to similar firms using market multiples.
● Q: In what scenarios is the asset-based approach more appropriate?
A: When valuing firms with minimal income, in liquidation, or asset-heavy businesses
like real estate or holding companies.
● Q: Why is valuation considered both an art and a science?
A: It uses mathematical models (science), but also requires judgment and assumptions
(art), especially in estimating future performance.
● Q: If you were valuing a small family-owned business, which method would you use and
why?
A: Asset-Based Approach or Capitalization of Earnings, due to limited financial data or
absence of comparables.
● Q: Which valuation method is used under PFRS 3 for business combinations?
A: Fair value measurement, typically using market or income approach for identifying
net assets.
● Q: Why do auditors scrutinize fair value estimates?
A: Due to estimation uncertainty and risk of bias; errors can lead to material
misstatements.
● Q: How can the principle of parsimony help avoid overcomplication?
A: Parsimony promotes simplicity—use only relevant variables to make models
understandable and reliable.
● Q: What’s the relationship between market efficiency and valuation?
A: Valuation identifies pricing errors. You profit when markets temporarily misprice
assets and later correct them.
● Q: Give a valuation-related example from prior accounting subjects.
A: FAR: Investment measured at fair value. AFAR: Goodwill on acquisition. FM: DCF
used in capital budgeting. Auditing: Testing fair value estimates.
