When we analyze a company, we look primarily at the assets it owns, the value of those assets, and the degree of risk or uncertainty associated with that value. Annual financial statements reflect the classification of assets well, reporting the value of each asset category, but they do not highlight the risk associated with that value.

   But what exactly is an asset? It is a company resource that has the potential to generate future cash inflows or reduce future cash outflows. Moving further towards the accounting perspective, resources should meet two more conditions to be considered company assets: they must have been produced or acquired in a transaction and the future benefits that could be generated from them can be quantified with a reasonable degree of precision.

   The accounting view of the value of an asset is largely oriented towards its historical cost, i.e. the initial purchase price or total production cost, adjusted upwards for any improvements made to the asset to date, respectively downwards for the loss of value associated with depreciation or "aging" of the asset.

   When there are indications that the current market value of assets is different from that recorded in the financial statements, there is an alternative way to measure the value of assets – fair value.

   The value of assets is summarized and reported in the annual financial statements in the form called Balance Sheet. Before showing how the value of assets is measured, it would be useful to see how they are classified in the balance sheet.

   In the first part we find fixed assets, which can be of three types: intangible (or intangible), tangible and financial.

Intangible assets include a wide variety of assets, from patents, software and trademarks to goodwill.

Tangible fixed assets actually represent the assets used in the long term in the company's activity, such as the building in which the products sold are manufactured, the land on which the building is located, the equipment used in their production, the means of transportation used to deliver the products, and the like.

Financial assets are typically those investments of the company in the shares or assets of other companies, as well as amounts invested in market-traded financial instruments, such as bonds and treasury certificates.

   The second part of the accounting asset is the assets used in the short term in the company's operational activity, usually up to one year. These are called current or current assets and include inventories (of raw materials, consumables, goods or finished products), receivables (amounts to be collected from customers) and cash in bank accounts and in cash.

   Let's see how the value of the asset categories described earlier is measured.

   The carrying amount of an asset can be taken from the purchase document or can be estimated by an authorized valuer using different methods included in the three recognized approaches: market, income or cost. The approaches used are selected by the valuer based on the purpose of the valuation and the type of asset being valued.

   In the case of intangible assets, it is very important to distinguish between those acquired and those generated internally by the company. When intangibles are generated internally, the costs involved in research and development are recorded in the profit and loss account for the respective year, even if the generated asset has a useful life of several years. Thus, the respective intangible asset is not highlighted in the company's balance sheet. On the other hand, when the intangible asset is acquired from another company or is received in a merger, its value is recorded separately in the balance sheet and will be amortized over its useful life.

   For the valuation of an intangible asset, methods from the income approach are mainly used, starting from the royalty savings that the owner of the asset benefits from (in the case of product brands, patents, licenses/franchises) or from the additional profit obtained by using that asset (in the case of non-compete agreements, licenses, unfinished research and development projects).

   Tangible fixed assets can be valued by appraisers authorized to value immovable property (buildings, land, special constructions) and movable property (machinery, equipment, installations). Their value can be estimated by applying one or more of the three valuation methods. Typically, assets that are traded or leased in an active market, such as land, office buildings or motor vehicles, are valued by comparing them with similar assets sold or available for sale, or by capitalizing/discounting the income generated.

   Financial investments such as equity investments in other companies can be valued by certified valuers specializing in business valuation. Typically, the income and market approaches are used as a priority, as is the case with the valuation of financial instruments.

   The valuation of current assets rarely requires the involvement of an authorized valuer, as they are reported in the financial statements at their book value. In certain circumstances, such as in insolvency proceedings, it is necessary to estimate the current value also for this type of assets, especially for inventories and receivables, as their book value may not be the correct one at that time.

   In this article, we've focused on a company's assets and how to measure their value. However, the balance sheet also includes a liabilities section, which represents the sources of financing, whether borrowed or owned, for the company's resources. We'll write more about liabilities and how to measure their value in a future article.

   With over 17 years of experience in the field of valuations, FairValue has a strong team of experts in accounting, finance, fixed assets and intellectual property. The over 60 appraisers from across the country, who make up the #fairvalueteam, are ready to promptly respond to any valuation request, regardless of its complexity and the location of the assets in Romania.