What are asset value methods based on? 

Asset value methods characteristically draw on historical data from financial statements. According to this method, the value of company can be determined as the difference between the carrying value of its assets and its liabilities.

What asset value methods are there? 

Asset value methods can essentially be divided into two categories:

• Valuation based on going concern principle
• Use of liquidation value

If we assume the going concern principle, assets can be valued at their carrying value or at the asset value adjusted to market value, thereby identifying any hidden reserves. In this case, the data of the company’s financial statements can be taken as the basis for assessing the values of assets and liabilities. A typical example of hidden reserves is a real estate purchased many years ago, where its market value may be much higher than its carrying value in the books according to an independent property appraiser’s evaluation.

The liquidation value is applied when the company’s owners do not want to or the company is incapable of continuing its operations, and therefore the owners are forced to sell the company’s assets to meet their obligations to creditors and pay other liabilities from the sales revenue. In the majority of such cases the liquidator generally has to define a value far below the market value, a so-called salvage value, to be able to turn the assets of the company into cash. So a valuation based on the liquidation value usually results in a lower figure for the company than a valuation based on the going concern principle.

What is the problem with asset values? 

The same asset may have different carrying values based on the accounting system used (for example IFRS or the Hungarian Act on Accounting), and the application of the options provided by the given system. So it is easy to see that asset value methods may be significantly influenced by the accounting valuation methods chosen by the company. At this point, revaluation using the buyer’s valuation methods becomes a possibility with a view to obtaining a more relevant figure.

Furthermore, we can try to identify hidden reserves among the assets, i.e. differences between the market value and the carrying value of assets, during which the assets and liabilities are valued at their market value instead of their carrying value. Defining market value, however, is a much more complex process than valuations based on carrying value. An appraiser might be needed to assess market value. The market value of assets can typically be defined by finding comparable prices or assessing the replacement costs.

When defining the carrying value of assets adjusted to market value, it is also possible to include assets during the identification of hidden reserves which were not included in the financial statements, such as goodwill and clientele. The goodwill mentioned above, which is designed to show how much more a company is worth than just the simple mathematical difference between its assets and liabilities, needs to be defined using a different business valuation method, the income-based method. This is how mixed valuation methods are formed. 

What is the significance of the method? 

From all the values of a company, asset value gives the minimum figure since each company’s value is equivalent to at least the value of its assets less the amount necessary to meet the company’s liabilities. One of the advantages is that the carrying value of assets can be retrieved very simply from published financial statements.

What are the drawbacks of asset value methods? 

The weaknesses of the method are as follows:

• This valuation does not take into account the future potential of the company.
• It does not consider the company’s strategies for the future.
• It can be influenced by measurement methods.
• When adjusting to market value an appraiser needs to be involved in the process.
• Identifying and valuing assets not included in the books – such as goodwill – is a very complex and time-consuming task.

Asset value methods are useful because they are simple. They are important because they define the minimum level of a company’s value.

If you have questions about business valuations, please contact our financial consulting experts!

A Asset value methods in business valuations bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

The draft bills proposed to the Hungarian National Assembly under No. T/625, primarily on taxation, also include changes to accounting rules. Among these changes in accounting rules we would like to draw your attention to the proposals expected from 2019 that we believe are likely to attract broad interest.

Changes in accounting rules for grant income

The bills entering into force as of 2019 and amending the Hungarian Accounting Act suggest that one of the anticipated changes in accounting rules will affect the accounting of grant income: based on the matching principle it will be possible to report grant income and accounted costs in the same period if the grant is demonstrably paid. This legal change would result in greater consistency both from an economic point of a view and also taking general accounting principles into consideration, compared to the current rules that require income to be accounted for either when financially settled, or when the grant is settled with the granting authority.

Having to supplement missing information that is mostly of an administrative nature very often means that the grant income and the relevant grant costs cannot be reported in the same period, which significantly distorts the comparability of financial years, primarily in the case of grants awarded to cover costs. Consequently, the above proposal is good news for companies receiving significant sums of grant income, particularly grants awarded to cover costs (expenditures), such as companies with R+D activities.

Accounting goodwill during conversion

The current Hungarian rules require that business shares, when purchased, should be reported in the books at their purchase price. If it is established when purchasing a business share – based on its future income-generating capacity  – that the purchase price of the target company includes significant goodwill, the bill would allow the goodwill to be recognised in the case of a subsequent takeover or merger.

In addition to examining the future income-generating capacity, this recognition is also subject to the expectation that the goodwill will be recovered in the future, and that the company being acquired will avail of the opportunity to conduct an asset valuation.

Among all the changes in accounting rules in 2019, this proposal is commendable too since the change was justified as an effort to mitigate the high capital loss of shares derecognised during takeovers and mergers. It is widely known that under the current rules goodwill may only be reported when purchasing business divisions. We believe that goodwill which may be reported in relation to a takeover or a merger as above is identical, content-wise, to the goodwill reported in relation to acquiring a business division . This is because the acquisition of the purchased business share can be construed as integrating a business division. This change may already be applied to transformations initiated after the law takes effect.

Changes in accounting rules for in-kind contributions of rights and concessions

The value of assets contributed by the owner of a business organisation as reported in the books of the owner company may be different from the value of the in-kind contribution set in the articles of association. The owner company may report the difference between these two figures as other income or other expenditure. From 2019 onwards, this rule must be applied for in-kind contributions of rights and concessions, similarly to other contributed assets.

If you would like to receive more detailed information on either of these changes in accounting rules in 2019, or if you would like to know how the changes will affect your company, please feel free to contact the professionals at our financial consulting division.

 

Szabolcs Szeles

financial advisory director

Tel: +3618873723

szabolcs.szeles@wtsklient.hu

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You can download our summary in PDF format here:
WTS Klient Newsflash 18.07.2018 – Changes in accounting rules from 2019

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A Changes in accounting rules from 2019 bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.