Valuations for Financial Reporting Purposes
Valuations for Financial Reporting Purposes
There are several reasons a business might need to have a business valuation done. The most common reason is to get a fair market value for the company for transaction purposes. A valuation may be necessary as a notional valuation, where the company is actually not exposed to the market for a transaction, but where the company is required to report specific value items on the financial statements under International Financial Reporting Requirements.
In any case, having an accurate and credible valuation is vital for financial reporting purposes. Management has the responsibility to make sure that the financial statements are presented fairly and accurately, and having an outside specialist provide guidance on valuations will help to ensure this.
This article will discuss the importance of using valuations for financial reporting purposes and why you should engage a business valuation specialist.
Presenting Accurate Financial Information
The first and most important cause of undertaking a business valuation is ensuring that the financial statements are accurate. This is especially crucial in situations where financial information will be presented to shareholders, creditors, or other interested parties.
In order to present financial information accurately, businesses need to follow conventional accounting standards. While management is responsible for ensuring that the financial statements are accurate, hiring a business valuation specialist will help add credibility to the numbers reported.
To ensure accuracy, you need to ensure that the valuation is done by a credible source. This is where a business valuation specialist comes in. They will have the experience and expertise to provide an accurate valuation of your company.
Auditors Will Review The Valuation
Another fundamental reason to use a business valuation specialist is that auditors will review the valuation report and its contents as support for its audit, and it will need to be sufficiently detailed to allow the auditors to opine on the data that is included in the financial statements. When shareholders, creditors, or others look at a company’s financial statements, they want to know that the information is reliable.
An auditor will review the valuation to deem that it is fair and accurate. This provides additional comfort to those who are looking at the financial statements. When an auditor reviews the valuation, they are looking at the methods used and the assumptions made.
Measuring Assets and Liabilities at Fair Value
IFRS requires fair value measurements for many assets and liabilities. In some cases, there is an obligation to measure at fair value on a recurring basis (e.g., investments held for trading). For other items, the measurement may be required only when circumstances change (e.g., an impairment charge relating to goodwill).
Measuring assets and liabilities at fair value is to provide financial statement users with information about the amounts, timing, and uncertainty of future cash flows relating to assets and liabilities. For a business valuation specialist to help you measure assets and liabilities at fair value, they must understand the IFRS standards.
Establishing Assigned Values
Intangible assets, such as patents and copyrights, often have assigned values for financial reporting purposes. To determine the assigned value of an intangible asset, a business valuation specialist will need to understand the accounting standards that apply to intangible assets.
Furthermore, an experienced business valuation specialist will be able to understand the valuation methods that are typically used to value intangible assets. This is important because the assigned value of an intangible asset can significantly impact the financial statements.
Financial Reporting Services
A business valuation specialist can provide financial reporting services. These services can help to ensure that the financial statements are accurate and fair.
Purchase Price Allocation
A business valuation specialist can assist in preparing a purchase price allocation. A purchase price allocation is a tool used to allocate the purchase price of a business to the various assets and liabilities of the company.
Upon the culmination of a transaction, under IFRS, a purchaser will have the ability to restate the assets and liabilities of the acquired entity to account for the fair value of the assets and liabilities acquired in a transaction. These will include tangible and intangible assets, including goodwill.
Identification of intangible assets
With intangible assets, it is often difficult to identify them. This is because intangible assets are not physical in nature.
A business valuation specialist can help to identify intangible assets. In addition, they will have the expertise and experience to understand how to value intangible assets. This is important because the value of an intangible asset can significantly impact financial statements.
Intangible assets can include:
• Customer relationships
• Intellectual property
To establish an acceptable purchase price, both definite life and indefinite life intangible assets need to be identified.
When formulating business plans, it is vital to think about the value of intangible assets. A business valuation specialist can help to identify these assets and determine their worth. This information will then be used in the financial planning process.
Valuation of goodwill
The value of your company’s reputation and “brand” is often one of the most valuable intangible assets on your balance sheet. But it can be challenging to determine the fair value of goodwill.
A business valuation specialist can help you understand the methods typically used to value goodwill. They will also have experience in applying these methods. This is important because the value of goodwill can significantly impact financial statements.
Determining the value of goodwill is important because it can be used to:
• Make strategic decisions about acquisitions
• Assess impairment charges
• Allocate purchase price in an acquisition
• Calculate economic damages in litigation
Annual Impairment Review
An annual impairment review helps determine in an impairment of a company’s intangible assets or goodwill may have occurred. This is important because an impairment charge can significantly affect a business’s financials.
During an annual impairment review, a valuation can help determine whether an impairment has occurred and if any quantification of the write-down is necessary. This valuation will be based on the company’s current situation and expected future performance.
If an impairment is identified, the company will need to recognize a charge on its financial statements. This charge can have a significant impact on the company’s net income. Therefore, with impairments, it is important to correctly identify the intangible asset or goodwill, determine the value, and allocate the impairment charge appropriately.
Additional Services a Business Valuation Specialist can Provide
A business valuation specialist can provide several other services in addition to those discussed above. These services can include:
• Business planning
• Valuation of potential targets
• Debt financing
When choosing a business valuation specialist, it is crucial to choose someone who has experience and expertise in the area you need support. This will ensure that you get the most accurate and reliable information.
Hiring a Business Valuation Specialist for Valuations for Financial Reporting
A business valuation specialist can provide guidance and assistance during an annual impairment review. They will have the experience and expertise to help you determine whether an impairment charge is necessary. This is important because an impairment charge can significantly impact financial statements.
At Beacon Valuations, our business valuation specialists have the experience and expertise to provide guidance and assistance during the financial reporting process.
If you would like to learn more about our services, please contact us. We are happy to discuss your business needs and how we can help. Our services include transaction support for the sale and purchase of businesses, including pre-sale planning, going-private transactions, and much more.