Question

What are some of the challenges when determining the value of operational assets?

Answer 1

Operating assets those assets that are acquired for use in the conduct of the ongoing operations of a business. Basically assets that are required to generate revenue. Operating assets include cash, inventory, fixed assets etc.

Challenges in valuation depend on the policies adopted to value each of the operating assets:

Fixed Assets - Determination of the depreciation rates and what method of depreciation to adopt to value the fixed assets. In terms of revaluation, the same needs to be checked every year to ensure that the valuation of the asset is in line with the market valuation.

Accounts receivable - Valuation of AR can be done in one of 2 ways:

Provision for bad and doubtful debts - can be deducted from AR and net amount can be shown ni the asset side or

provision for bad and doubtful debts - can be shown as a liability and the gross amount of AR can be shown on the asset side.

The main challenge in determination of the value of operating assets is the various methods in which each of them can be valuated and to determine what method is the best depends on the nature of business, transactions as well as the size of the business.

Another challenge in determination of the value also depends on whether the valuation is on book value or it is on market value. Market value can be easily determined in the case of a company which is a listed one. Unlisted and small companies to use market valuation might need extensive amount of research based on the valuation of their peer companies and hence the same would be only relative in nature.