Why is Asset Valuation Necessary?
Why do accountants go through the exercise of crunching tons of numbers to compute the value of assets? Here are reasons why all that effort is necessary.
To Ensure the Right Price is Paid
When a business or any individual is considering investment in a particular asset, its valuation is necessary to ensure that the right price is paid. That is the most fundamental reason why asset valuation is an important activity in accounting.
For Taxes
Taxation is one of the primary reasons why valuation of assets becomes an essential exercise. There is property and income tax to be paid, which requires the valuation of real estate property, as well as other assets. This makes accurate calculation of tax dues possible.
To Analyze Investment Potential
If you are investing in a real estate scheme, a business or any other entity, with the purpose of asset creation, it’s imperative that valuation of the entity be undertaken. It helps you in gauging the future earning potential of the asset.
For Financial Reports and Audits
For public listed companies or businesses that fall in regulated sectors, it’s mandatory that they provide financial reports and subject themselves to financial audit. This reporting and expected transparency from businesses necessitates that asset valuation be carried out. Investors can then decide the worth of a company, from the valuation of its assets.
For Mergers and Acquisitions
When two companies are thinking of merging together or an acquisition is being planned, asset valuation is absolutely essential. This helps the people involved know the worth of any company involved in such a financial takeover or merger. It helps in ‘sizing up’ a business.
Loan Applications
When a business or any individual applies for a big loan, banks demand collateral. Whatever assets pledged as collateral, need to be valued. It forms an important detail, as the bank grants a loan, against the value of the security you offer. Read the rest of this entry »
