Asset valuation definition
/What is Asset Valuation?
Asset valuation is a process followed to derive the current value of an asset. This can be done in a variety of ways, such as deriving the price based on the sales of similar assets on the open market, or by calculating the present value of its future cash flows, or by compiling what it would cost to construct it from scratch. These valuations are typically applied to assets as part of their transfer to another party, as occurs in an acquisition, an individual asset sale, or an inheritance transfer. Valuations may also be needed when assets are being insured.
The Subjectivity of Asset Valuations
Intangible assets and customized assets are especially difficult to value, which may result in a valuation that can only be defined as a range, due to the subjective nature of the analysis. Generally, the absolute floor for these measurements is the depreciated cost of these assets on the books of the asset owner, with most valuations clustered above this amount. Given the variability of valuation outcomes, it can make sense to derive an asset valuation using several different methods; doing so gives a range of possible valuations that most likely encompass the value of an asset if it were to be sold.
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Asset Valuations in Lawsuits
Plaintiffs can argue that the board of directors of a business that either bought or sold assets did so at an incorrect valuation, and therefore breached their fiduciary duty to shareholders. In these situations, the asset valuation methods used can be reviewed in court, with expert witnesses commenting on the failings of the methods used.