Many entities in the market often need to evaluate different assets due to sale/purchase of activities, sale/purchase of stock, intangible assets, merges/separation of companies, standard accounting requirements, taxation requirements, dismantling processes etc’. Valuations are arithmetic tools designed to assist during assessing asset value and as such are not exact science due to it depending on assessments and future activities predictions at present given time.
Seeing that valuations are mostly based on future predictions that might affect the assets value, the measurement must be performed with minimal damage to the credibility of the examined information by examining all events and future scenarios, internal and external that might assist in making decisions when assessing any assets.
Fair value is defined as the total amount that would have been received from selling an asset or the amount paid to relive a liability through out the regular business trade in a free market between two sides that aren’t related. In order to asses the fair value of a certain asset, one must first examine the purpose of the assessment, the value to a disassembled company is different to an active long term planning company, for as to a company being disassembled the common value is all the company’s assets deducting the liabilities, and for an active company the common activity value is the cash flow value or The multiplier method. Following are a number of methods to determine asset value:
- Market value – when an asset has an active market, the market price can be quoted as the assets value. For example: exchangeable stocks with an active market enabling to know the fair value at any time.
- Market value with adjustments – information regarding similar assets is often obtainable, for example real estate available in certain locations at different times that require value appreciation. In this scenario the real estate can be appraised by relying on the selling transaction of real estate near by while making the proper adjustments.
- Valuations – valuations are usually applied when an asset has no active market and can not be compared to similar assets.
Following are a number of methods to assessing companies with no active market:
- The asset value method – this method espouses valuating the company’ value when a company is being dismantled and their activities are halted immediately. Value appreciation is determined by examining the value of the company’s assets and deducting their liabilities, company expenses and tax expenses.
- Earnings ratio method- this method is based on company comparisons, in which companies in the same operational risk branch should reflect a similar earning ratio while considering adjustments. In order to determine the earning ratio method a number of companies must be sampled and the stock vale is to be divided by the proportional part of the profit to the stock. The average of the result is the average earnings ratio for that field, which is to be multiplied by the company’s profit in order to determine it’s true value.