Assets Financial
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From
Wikipedia, the free encyclopedia
In finance, valuation is the process of estimating the potential market
value of a financial asset or liability. Valuations can be done on assets
(for example, investments in marketable securities such as stocks, options,
business enterprises, or intangible assets such as patents and trademarks)
or on liabilities (e.g., Bonds issued by a company). Valuations are required
in many contexts including investment analysis, capital budgeting, merger
and acquisition transactions, financial reporting, taxable events to
determine the proper tax liability, and in litigation. |
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Business valuation
Businesses or fractional interests in businesses may be valued for various
purposes such as mergers and acquisitions, sale of securities, and taxable
events. An accurate valuation of privately owned companies largely depends
on the reliability of the firm's historic financial information. Public
company financial statements are audited by Certified Public Accountants
(US), Chartered Certified Accountants (ACCA) or Chartered Accountants (UK
and Canada) and overseen by a government regulator. Alternatively, private
firms do not have government oversight—unless operating in a regulated
industry—and are usually not required to have their financial statements
audited. Moreover, managers of private firms often prepare their financial
statements to minimize profits and, therefore, taxes. Alternatively,
managers of public firms tend to want higher profits to increase their stock
price. Therefore, a firm's historic financial information may not be
accurate and can lead to over- and undervaluation. In an acquisition, a
buyer often performs due diligence to verify the seller's information.
Financial statements prepared in accordance with generally accepted
accounting principles (GAAP) often show the values of assets at their
historic costs rather than at their current market values. For instance, a
firm's balance sheet will usually show the value of land it owns at what the
firm paid for it rather than at its current market value. But under GAAP
requirements, a firm must show the values of some types of assets—securities
held for sale, for instance—at their market values rather than at cost. When
a firm is required to show some of its assets at market value, some call
this process "mark-to-market." But reporting asset values on financial
statements at market values gives managers ample opportunity to slant asset
values upward—to artificially increase profits and stock prices. Managers
may be motivated to alter earnings upward so they can earn bonuses. Despite
the risk of manager bias, investors and creditors prefer to know the market
values of a firm's assets—rather than their costs—because the current values
give them better information to make decisions. |
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