Asset Valuation

1. Tangible Asset Valuation (Tangible Assets)

What are Tangible Assets?

Tangible assets are physical, material resources owned by a company, including its equipment, machinery, factory buildings, vehicles, production lines, and infrastructure.

Valuation Methods:

• Historical Cost + delivery/installation costs, site preparation.
• Revaluation Model — updating the value considering depreciation, wear and tear, and market changes.
• Replacement Cost — how much it would cost to build/acquire a similar asset today, considering wear and tear and technological obsolescence.

Nigeria Specifics:

• Significant depreciation due to climatic conditions, improper operation, or maintenance interruptions.
• Replacement or restoration costs may be higher than expected due to imported components and currency fluctuations.
• Finding similar assets for comparative analysis can be challenging, particularly outside major metropolitan areas.

2. Intangible Assets Valuation

Intangible Assets encompass:

• Goodwill – reputation, customer base, brands
• Patents, copyrights, trademarks
• Software development, R&D
• Licenses, rights to use, etc.

Valuation Methods:

• Discounted Cash Flows (DCF) – forecasting future income specifically attributable to the intangible asset (e.g., a brand or software) and discounting these cash flows back to a present value.
• Market Analogs – searching for similar transactions involving comparable assets, patents, or licenses, if a transparent market exists.
• Cost Method – calculating the costs incurred to create or develop the asset, adjusted for amortization or obsolescence.

Nigerian Specifics:

• Difficulty in accurately forecasting revenue from brands or licenses.
• Lack of transparent markets for buying and selling intangible assets in Nigeria.
• Compliance with international standards, such as IAS 38 – Intangible Assets, is required, especially for public companies.

3. Financial Asset Valuation

Financial Assets include:

• Shares, bonds
• Accounts receivable
• Investments in funds, interests in subsidiaries
• Deposits, long-term financial liabilities

Valuation methods:

• Market Value — used when a financial instrument is actively traded on a stock exchange.
• Comparative Approach — benchmarking the asset against similar instruments available in the market.
• DCF — applied to investments that are expected to generate a future stream of cash flows..
• Credit Risk/Default Risk Considerations — crucial for insolvent debtors or volatile markets.

Nigeria Specifics:

• Foreign exchange risk — financial assets denominated in foreign currencies are subject to significant fluctuations.
• Limited liquidity of some securities.
• Multiple markets (local, regional, international) with varying degrees of transparency.

4. Movable Property Valuation

This asset class includes:

• Furniture, office equipment
• Vehicles
• Mobile and stationary production equipment, installations
• Computers, appliances, IT equipment

Valuation Methods:

• Purchase price or invoice availability.
• Replacement/reproduction valuation considering depreciation and service life.
• Depreciation valuation – calculating both physical wear and moral (technological) obsolescence.
• Reversed market method – determining the asset’s value based on its potential selling price in the secondary (used) market.

Characteristics:

• Rapid technological obsolescence, especially in the IT sector.
• Impact of operating conditions (humidity, fuel choice, power outages) on service life and condition.
• Potential difficulties in confirming the location and condition of movable property in remote areas.

5. Real Estate Valuation (Immovable Property)

This asset class encompasses:

• Land
• Buildings (residential, commercial, warehouse, industrial)
• Specialized structures

Valuation Methods:

1. Sales Comparison Approach: Comparison with recently sold similar properties in the same area.
2. Income Capitalization Approach: Valuation based on rental income, capitalization of this income at a risk-adjusted rate.
3. Cost/Replacement Method: This determines how much it would cost to construct the same building today, less an allowance for accrued depreciation.
4. Residual/Development Method: For developments and development sites, the potential value after completion is assessed.

Nigerian Specifics:

• Presence of illegal or informal transactions where there is no official documentation.
• Differences in cadastral data and property rights, especially in rural areas.
• Regional price differences: Lagos, Abuja, and Port Harcourt are significantly more expensive than less developed areas.
• Infrastructure: access to roads, electricity, and communications greatly influences prices.
• The effects of devaluation, currency fluctuations, and economic instability impact investor expectations.