Saturday Dec 14, 2024
Friday, 14 August 2020 00:00 - - {{hitsCtrl.values.hits}}
Every asset has a value, however the methods and techniques used in asset valuation will vary from case to case. As a result of this, there is much uncertainty associated with the term ‘valuation’.
KPMG in Sri Lanka Principal – Deal Advisory Shiluka Goonewardene |
KPMG in Sri Lanka Director – Deal Advisory (Valuations and Restructuring) Ajantha Weerasekara |
KPMG Academy conducted a free webinar on ‘Introduction to Valuation’ featuring KPMG Director, Deal Advisory Ajantha Weerasekara, on 4 August. This webinar was conducted with the aim of shedding light on the fundamentals of valuation on different asset classes, used for different requirements and were presented with six key areas related to the topic followed by an interesting Q&A session.
The key takeaways of the webinar:
What is valuation and why do we need it?
The webinar kicked off with Ajantha’s simple explanation, valuation is an estimation of the value or worth of a particular asset. He further went on to explain that valuation is important for transactions and tax and regulatory purposes of both business and personal nature. Further, valuations are an essential part of accounting and reporting requirements, and also considered in capital market transactions and by corporates in their internal decision-making process, such as decisions on how to improve value and identify value drivers.
Key valuation concepts
The webinar brought light to four of the main concepts:
What can be valued and how?
Any asset can be valued, specifically income generating assets or public assets. These can be classified into two broad categories:
Valuation approaches
Each of these approaches contain intrinsic value methods and relative value methods. Valuation is done based on intrinsic characteristics in the intrinsic value method. For example, a business would be valued by putting value on future income generating capabilities. However, in the relative value method, valuation is based on the value of a similar asset or based on rule of thumb.
Commonly used valuation methodologies
When using market approach to value intangible and tangible assets, market price is often used if it is listed in the stock market. Relative valuation methods such as direct comparisons of companies or assets can also be used however, it is not the most ideal approach for intangible asset valuations, as no assets will be identical. When it comes to tangible assets such as property valuations, the comparison method is a commonly used relative valuation method under the market approach.
Income approach involves the use of methods such as discounted cash flow, earnings capitalisation, residual income and market multiples in valuing intangible assets however, of these methods discounted cash flow method and market multiples method are most commonly used. Financial services are one exception to this, as the residual method is often used for this purpose. Income approach is typically used when valuing tangible assets, more specifically, income method, profit capitalisation and discounted cash flow methods can be used.
In valuing intangible assets under the cost approach, the net asset value method is generally used. However, for valuing tangible assets such as land and buildings the contractor test method is used.
Key considerations in valuations
Companies may seek valuations for various reasons such as corporate governance or regulatory reasons, or because management wants to understand value better so it can make optimal decisions. In these instances, a company is often at a critical juncture and therefore, accuracy is often utmost importance. KPMG in Sri Lanka has a comprehensive team of professionals equipped with the right tools and experience, headed by Principal – Deal Advisory Shiluka Goonewardene, prepared to provide efficient and focused advisory assistance on crucial issues to enable clients make effective decisions based on accurate and relevant information.