Posted on: 16 July 2021
One of the trickiest aspects of financial reporting is when you have to attach a valuation to an unusual asset. The world is thousands of years separated from the days when asset classes only included simple things like tracts of land, herds of farm animals, and gold. Instead, people now have to think about financial reporting valuation for things like cryptocurrencies, artworks, and collectibles.
How do you address the challenges of alternative investment valuation? Keep these three issues in mind before you file a financial report on these kinds of assets.
What Makes Something an Alternative Investment?
Generally, you can consider an investment "alternative" if it is hard to place a price on. This occurs when something is rare, such as a vintage bottle of wine or a one-of-a-kind baseball card. Volatility in price can also create trouble with pinning down a valuation, a common problem with some derivatives contracts. Things that don't come up for sale frequently, such as prints from a famous artist, are tough to value too.
Note that the difficulty in saying for sure what the price of an asset might be is the defining feature. These are often assets that require professionals to tell other people what they even are.
The Importance of Documentation
It's hard for someone to take your word on what many of these items are. Someone purchasing a vintage video game cartridge, for example, can't point to the same authoritative valuation as they can with a car. There is no blue book number when it comes to producing an alternative investment valuation.
Frequently, the closest thing to a fair market value comes from the last time a similar asset came up for auction. This can be a low-liquidity market, though, and an auction value might be seriously out of date.
People will want to see the documentation for the value you're reporting. If you're trying to insure such an item, for example, you're going to need a valuation in writing from a respected professional. This often comes with a description of the asset and why the value is what it is. Also, the valuations frequently are stated in ranges because it's hard for a professional to say for sure a specific price is appropriate.
When Will You Need a Valuation?
Financial reporting valuation requirements apply in a host of scenarios. You may need a valuation to set up an estate, pay taxes, satisfy business financial reporting requirements, make a donation to charity, use an asset as collateral, or obtain insurance.Share