What do you mean by “valuation of assets”?

(a) Meaning of Valuation of Assets

The term “valuation of assets” means the determination of the exact value at which assets are shown in the Balance Sheet. It can be interpreted in different ways, as representing – a) the estimated amount that an asset would produce if sold or liquidated (known as the “realisable value”); (ii) the amount that is estimated would be required to purchase another asset of the same type to replace the existing one (known as the “replacement value”); (iii) the amount that an asset • costs, when purchased or acquired, less the provisions made for depreciation since acquisition (known as the “going-concern value”). All of the above bases may be used in connection with the statement of the various classes of assets in a Balance Sheet. But, it is to be emphasised, the true value of an asset does not necessarily mean the amount that an asset, if sold, would realise. That would be difficult to arrive at in almost all cases. The purpose of drawing up a Balance Sheet is to show a fair estimate of the value of the assets of a company as a going concern. A Balance Sheet is not a valuation statement showing the estimated realisable values of the various assets of a concern but rather showing how the capital stand invested. If the values shown are based on principles generally recognised as sound and correct, and if the basis of calculation is clearly indicated on the Balance Sheet, then such Balance Sheet is “properly drawn up so as to exhibit a true and fair view of the state of the company’s affairs” as required by the Act.

b) Importance (Object) of valuation of Assets

The object of the valuation of assets is to show that the Balance Sheet represents a “true and fair view” of the state of affairs of a concern and that there is no manipulation of accounts to inflate profits. The capital of business represents the surplus of assets over liabilities and the increase of such surplus represents the profit or loss. It is therefore evident that the ascertainment of the profit or loss is absolutely dependent upon the amounts at which the various assets are stated in the Balance Sheet.

For example, if proper depreciation on assets is not provided for actuaslh. own in the Balance Sheet, the profit will be more than the In a joint-stock company, it would be dangerous because the shareholders would receive more devidend, a part of which would be paid out of capital. This is contrary to the Companies Act. Besides the Balance Sheet does not exhibit a “true and fair view” of the state of the company’s affairs because the assets are not stated in the Balance Sheet in their actual values.

Thus the importance of valuation of assets for Balance Sheet purposes needs no exaggeration.

Problems in the Valuation of Assets

valuations of assets in the Balance Sheet in respect of the 2. Discuss the problems which confront an auditor For a Balance Sheet to show a true and fair view of the financial position of a concern, it is essential, among other things, that assets are properly valued. But the auditor is confronted with certain problems regarding valuation of assets. The valuation of assets is done by the proprietors or responsible officials of the company or the firm or by some independent and expert valuer. The auditor is entitled to rely upon the certificates of valuation rendered by the management or the valuer. He cannot be expected to possess the technical knowledge to determine the value of the assets. Nevertheless he should verify such values with reference to relevant documentary evidence and other information obtained before accepting the certificates of valuation. He cannot guarantee the correctness of the valuation of the assets. But he should ascertain that valuation is made on principles accepted as sound and correct. Much will depend on the nature of the business and the class to which the assets belong. Assets may be valued at “replacement value” (i.e. the amount which would be required to purchase the same type of asset to replace the existing one) or “realisable value” (i.e. the price which the asset would fetch if sold in the market) or “breakup value” (i.e. scrap value, the amount which would be realised from sale of a particular asset when it becomes unserviceable). The auditor is simply to see that valuation is made on principles accepted as sound and correct. If he is not satisfied with the mode of valuation, he must mention this fact in his report. In particular, the auditor should never allow the assets to be valued for the purpose of balance sheet at their breakup values as if the business was closed. The assets should be valued as for a going concern.

A tricky problem which confronts an auditor is the valuation of assets during the inflationary period. The value of stock, for example, may not be sufficient to meet the cost of replacement of the same quantity of stock. This problem may be solved, it has been suggested, by valuing stock-in-trade at marketprice and depreciation should be provided on the value of the stock so arrived.

Updated: July 10, 2019 — 8:07 am

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