Corporate Accounting

What do you understand by valuation and why there is a need for valuation?

What is Valuation?

Valuation is the process of appraising or determining the worth of physical or intangible assets, securities, liabilities, and a particular firm as a going concern or any listed or unlisted corporation, partnership, or sole proprietorship.

The word ‘value’ refers to the material or monetary worth of an object, which may be measured in terms of the medium of exchange.

Valuation is the analytical process of assessing the present (or predicted) value of a business or an asset. The importance of business valuation necessitates that a business owner or person be aware of a company’s worth. The fair market value criterion requires an independent buyer and seller to possess the necessary knowledge and facts, to be free from undue influence or pressures, and to have access to all of the relevant data in order to make an educated choice.

Need for Valuation

The need of valuation for numerous statutory and commercial objectives may be summarised as follows:

  • Government compensation to shareholders as part of a nationalisation programme.
  • Formulation of a plan for the merger.
  • The purchase and selling of private company stock.
  • Securing a loan using shares as collateral
  • Exchange of shares
  • Purchase of a block of shares with the intent of obtaining a stake in another firm.
  • The purchase of shares by workers of a corporation whose ownership is restricted to the duration of their employment.
  • Acquisition of dissident shareholders’ shares under a plan of reconstruction.
  • To establish a value foundation for a company where no prior valuation has been undertaken.
  • To establish a baseline value for the firm and build a plan to raise its profitability and value in preparation for an exit strategy.
  • Determine if the firm is expanding, stagnating, or losing value in order to reorganise it.
  • To calculate the possible built-in capital gains tax in a C-Corporation to S-Corporation conversion.

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