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FAQ (Frequently Asked Questions)
- What does the term "Appraisal" mean?
- What is the difference between Fair Market Value, Zonal Value and Assessed Value?
- Fair Market Value is the amount which a willing buyer and a willing seller would exchange in the current open market.
- Zonal Value is the amount set by the BIR with the assistance of realtors and other knowledgeable persons in the area as the basis for capital gains, transfer, donor's and creditable witholding taxes, expropriation and other transactions with the government. Ideally, zonal values should approximate the fair market value. However, they are not constantly updated so they are either too high (specially with the current downward trend of land prices), or too low (specially if recent commercial developments occurred in the area).
- Assessed Value is the amount set by the municipal or city assessor as basis for computing the annual real estate tax. This amount is the least of the 3.
- Why should a company have its assets appraised?
- The financial statements of a company are stated in terms of a specific unit of measure, which, in our case, is the Philippine peso. The general purchasing power of this unit of measure, however, changes over time. Under the conventional methods of reporting, financial statements are based on historical cost despite the changes in the purchasing power of the unit of measure. Thus, financial statements present a conglomeration of values at different levels of purchasing power. This has led users of financial information to question the relevance of financial statements based principally on historical cost and to advocate the recognition of the effects of inflation in the accounts.
When the company's Plant, Property and Equipment are stated in historical cost (which is much lower than the current values of these facilities), depreciation charges to operations are naturally lower and the reported net income is consequently higher. If earnings are declared based on such reported income, the company, in effect, may be unknowingly distributing unrealistic profits to the stockholders and dissipating rather than conserving the capital of the business. Likewise, what may seem like profitable operations may actually be incurring losses by not setting the price which would give the company enough returns on the basis of higher replacement costs.
- How are appraised values recognized and recorded in the financial statements?
- To incorporate appraised values in the balance sheet, the following requirements should be followed (as specified in the Financial Accounting Standards):
- the appraisal should be made by recognized specialists independent of the company which owns the property;
- depreciation to be charged to operations should be based on appraised values;
- the revaluation increment should be shown under stockholders' equity under a separate caption;
- the required disclosures should be made in the financial statements.
- Where else are appraised values useful-aside from corporate accounting?
- Sales/purchase negotiations
- Mortgage financing
- Mergers and acquisitions of companies
- Insurance (Placement/Rating/Proof of Loss)
- Estate Planning
- Litigation
- Tax Computation (Income/Estate and Gift/Ad Valorem Assessment)
- Site Selection
- Lease Negotiations
- Acquisition in Eminent Domain
- Corporate and Financial Reorganization and other Management Decisions
- It is easy to grasp the concept of appraisal of tangible assets like land, buildings and machinery. However, how is it possible to appraise the total business as well as its intangible assets like brand names, trademarks, franchises, intellectual property rights and goodwill?
- Intangible assets provide companies the needed competitive edge. It is the reputation, technology, designs and knowledge that largely contribute to the success of the business. They enable the business to earn above-normal income with the identifiable assets employed in the business. Using the Income Approach to Value, the expected future economic benefits or the projected cashflows of the company for the next 5 or more years are recognized based on the company's past performance and converted to the net present value. This value represents the aggregate value of the enterprise as a whole. The other side of the equation is composed of the tangible and intangible assets of the corporation which, together with working capital contribute to the firm's operations. Since the net present value of the future cashflows, the tangible assets and the net working capital of the company are easily identifiable, the intangible assets can then be derived.
Three (3) basic approaches to value
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