Valuation

Valuation is the process of estimating the economic value of an asset, a business, a liability, or a financial instrument. Valuations support decisions in investing, lending, financial reporting, taxation, corporate finance, and litigation. They may produce a point estimate or a range of values depending on the purpose and the information available.

Valuation uses three broad approaches: cost, market, and income. The cost approach estimates value based on the cost to reproduce or replace the asset, adjusted for physical deterioration or obsolescence. The market approach derives value by comparing the asset with similar items that have traded recently, using price multiples or other transaction data. The income approach converts anticipated future cash flows into present value using a discount rate, capitalization rate, or a combination. Common methods under these approaches include discounted cash flow analysis, capitalization of earnings, guideline company or comparable transaction analyses, and replacement cost calculations.

Valuation applies to tangible assets (real estate, equipment), financial assets (stocks, bonds), and intangible assets (patents, brands). For businesses, valuations often express enterprise value or equity value and may incorporate synergies or control considerations. Professional standards and ethical requirements guide practice; prominent frameworks include IFRS 13, ASC 820, and industry standards issued by IVS or USPAP.

Inputs include expected cash flows, growth, risk, discount rates, and market data. Outputs can be a single value or a range, with sensitivity analyses to reflect uncertainty. The valuation process typically involves defining purpose and scope, gathering data, applying methods, reconciling results, and documenting findings in a valuation report.