Are you interested in finding out more about valuing a company’s assets and finance for non-financial managers?
Have you ever wondered why you can’t understand a word that accountants and financial managers say? Well, speaking in accounting and finance jargon is deliberate of course, because if everyone knew the jargon, then we wouldn’t need specialists.
Now some of this is good, but increasingly it’s not so good, particularly when it means that non-financial managers don’t get an even break.
If you are a non-financial manager, such as an engineer, scientist or lawyer, who wants to understand more about the principles and concepts of management accounting and finance, here is an example of something that can and does happen that is worthy of a little attention and understanding. It is the little matter of asset accounting finance and the valuation of a company’s assets.
Asset accounting finance – the valuation of a company’s assets
So you thought the value of an asset was related to what it cost! Most of the uninitiated will consider that the value of an asset carried on a company’s books is related to the cost of the asset perhaps adjusted by a loss of value due to depreciation over time, or even adjusted upwards because of the inflationary effect of the cost of replacement.
However, increasingly in the financial world, advantage is taken of the allowable valuation practice in current accounting standards where it is possible to ascribe a value to an asset which reflects its earning capacity, not its cost. These valuations are arrived at using a discounted cash flow model. Using this valuation methodology, where an asset rich business is returning good profits, there will be a significant increase in the value of assets. It also has the effect that where profits are judged by “return on assets” and the company is operating in a poorly competitive marketplace, the returns are artificially lowered because assets simply increase in value to keep pace with returns.
Interestingly, the New Zealand state owned company Mighty River Power, which is planned for partial privatisation in the near future, has its assets valued in this manner and at first glance, the authorised valuation of its assets is in the order of four times their depreciated replacement cost!
So the upside of valuing assets in this manner is that a company will be perceived as being financially stable by virtue of its asset backing. However, the reverse position where there is a long term decline in returns can see a drastic decrease in the value of assets and a subsequent instability in the company’s future prospects.
Ross Bauld is a Principal at Continuing Professional Development with over 30 years of professional experience in infrastructure, asset and resource management including leading private and public sector organizations at Chief Executive level. In October 2013 Continuing Professional Development will be offering online courses developed by Ross Bauld on Finance for Non-financial Managers and Technical Professionals. Part 1 covers Finance Fundamentals, the Big Picture, Company Accounts and Cash Flow.
Are you a non-financial manager who wants training in finance and accounting concepts and principles, so that you can upskill and take a more advanced role in the management or leadership of your organisation? To find out more about our online courses visit Finance for Technical Professionals-Part 1