Valuation of assets and liabilities

What it means

Asset valuation determines the amount at which assets and liabilities are recorded in the books and shown in the financial statements. The Accounting Act prescribes valuation bases depending on how the company acquired the asset, and rules for adjusting values at the reporting date.

Purchased assets are measured at acquisition cost including related costs, self-constructed assets at production cost, and assets received free of charge or newly found at a stock count at replacement cost. Cash and receivables are measured at nominal value.

Some items, such as trading securities or derivatives, are remeasured to fair value at the reporting date. For other assets the prudence principle applies: if their value is lower than book value, the difference is recognised through an impairment allowance or a write-down.

How it works in practice

For every new asset we decide what belongs in its cost: transport, installation, duty and fees do; interest only if the accounting policy says so; recoverable VAT does not. A cost classified wrongly distorts depreciation for years to come.

For inventory the company chooses how to measure issues, for example FIFO or weighted average cost, and must apply it consistently. Assets and liabilities in foreign currency are translated at the ECB rate at the reporting date, and exchange differences go to income or expenses.

Before year end we review assets whose value may be lower: obsolete stock, uncollectable receivables, idle machines. We document each adjustment, because the tax deductibility of allowances follows its own rules that differ from accounting.

What to watch out for

An asset acquired as a contribution in kind is measured at the value agreed in the articles on the basis of an expert valuation. If the value is overstated, the share capital is in fact lower than the register shows, and the contributor and directors may be liable.

Changing the valuation method mid-year or without justification breaches the consistency principle. If a change is made, it must be described in the notes together with its effect on profit, otherwise the statements are misleading.