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Mandatory Valuations for Financial Statement Compliance in a Company

By April 22, 2024Blog5 min read
valuation for financial reporting

Ensuring transparency and accuracy in financial reporting is paramount for maintaining trust and confidence among stakeholders. To achieve this, companies are required to adhere to stringent accounting standards that mandate the valuation for financial reporting of various assets and liabilities. Under the Indian Accounting Standards (IND AS), specific standards outline the requirements for mandatory valuations to ensure compliance and integrity in financial statements.

Mandatory Valuation for Financial Reporting

Mandatory valuation is a critical component of maintaining transparency and accuracy in a company’s financial statements and includes:

1. IND AS 36 – Assessing Asset Impairment

Assets can indicate impairment due to various factors. When this happens, evaluating the asset to determine its true value is important. Certain assets, like those with indefinite useful life or goodwill from acquisitions, need annual impairment testing, even without obvious signs.

The recoverable amount, determined as the higher Value in Use (VIU) or Fair Value Less Cost of Disposal (FVLCD), plays a crucial role in impairment valuation. Fair value less disposal costs (FVLCD) is the amount obtained from selling an asset, minus disposal expenses like legal fees and taxes. Value in Use (VIU) estimates future cash flows from asset use and is discounted for risks. If the recoverable amount (FVLCD or VIU) is less than the carrying (book) value, it indicates impairment. This means recognizing a loss because the asset’s value has declined.


Read More : The use of intangible asset valuation in tax planning and litigation


2. IND AS 38 – Managing Intangible Assets

Intangible assets, like patents and trademarks, need regular reassessment to reflect their value accurately. These valuations ensure companies identify any potential decline in value and maintain accurate financial records.

When a company identifies an intangible asset, it values it using different methods. If the asset comes from a separate acquisition, the cost is calculated based on the purchase price and associated preparation expenses. Their fair value at acquisition determines the cost of assets acquired through business combinations. If the intangible asset and the grant are acquired via a government grant, they are initially recognized at fair value.

Also, if obtained through a non-monetary transaction, the cost is assessed based on the fair value of the asset given up or received, whichever is clearer. If the fair value cannot be reliably measured, the cost is determined based on the carrying amount of the asset given up. After recognizing intangible assets, companies choose the ‘Cost model’ or ‘Revaluation model’ for accounting.

Read More: The Impact of Industry and Economic Factors on Business Valuation

3. IND AS 40 – Investment Property

This standard focuses on investment properties held for rental income or appreciation. Regular valuations are vital to determine their fair market value, ensuring accurate financial reporting by reflecting their current value.

For investment purposes, when you first acquire an asset, such as a property, you record its value at the initial cost. This cost comprises not only the purchase price of the property itself but also any additional expenses directly linked to acquiring it, such as legal fees or brokerage commissions. However, certain costs are excluded from this initial valuation. These exclusions include expenses incurred before the property is fully operational, like setting up utilities or preparing the property for occupancy.

Additionally, operating losses accrued before the property reaches its planned occupancy level are not factored into the initial cost. Furthermore, any abnormal losses experienced during the construction or development phase of the property are also not included.

4. IND AS 109 – Financial Instruments

This standard involves valuing financial instruments like loans, investments, and derivatives. Given their varying market values, accurate valuation is essential to reflect their true value on the balance sheet, thus preventing financial misrepresentation.

Financial assets and liabilities are first evaluated at their fair value. Fair value is the price at which an asset or liability could be traded between informed and willing parties in a standard transaction. This value usually aligns with the transaction price. The valuation method and the treatment of valuation changes depend on the classification of financial instruments, and they should be valued on the measurement date.

Read More:  Valuation of Investment: Why it is Important for Investors

Unlock the True Value of Your Assets

Adherence to mandatory valuations under relevant IND AS standards ensures accurate financial reporting, transparency, and compliance. This safeguards stakeholders’ trust and maintains integrity in company finances.

Additionally, seeking expertise from qualified independent valuators ensures accuracy, reliability, and compliance with valuation standards. This enhances the credibility of financial statements and mitigates risks of misrepresentation. At RNC, we employ a team of multidisciplinary experts to deliver precise valuations for financial reporting that comply with IND AS. Contact us today for expert company valuation services tailored to your company’s needs and compliance requirements.