Valuation Method

Posted in Finance, Accounting and Economics Terms, Total Reads: 2399

Definition: Valuation Method

Valuation Method is a specific way to determine the value of a security, business, business ownership interest or intangible assets and hence estimate its worth.

Valuation can be done on assets such as stocks, options, business enterprises or intangible assets such as patents or trademarks.

Valuation method determines the current worth and therefore is used to quantify in terms of monetary terms considering its benefits. Valuation methods are generally of three types: approaches that are based on the principle of substitution and consider sum of all business investments (cost approach), sum of all future benefits (income approach), or valuation by comparing it with the value of similar assets or businesses (market approach).

Different approaches are followed to value different types of assets.

For example:

Valuation Methods used for determining value of different assets is briefly given below:

  • Fixed Asset Valuation methods: Cost method, Market Value method, Base Cost method, Standard Cost method, Average Cost method etc.
  • Inventory Valuation methods: First in First Out method, Last in First Out method, Weighted average method (as allowed by GAAP)
  • Business Valuation method: Asset-bases approaches , Earning value approaches such as Discounted Cash Flow method and Market Value approaches (by comparing with similar businesses)
  • Intangible assets Valuation method: Cost approach (based on economic principle of substitution) , income approach Market approach , Income approach, Relief from Royalty approach (present value of royalties that company is relieved from paying as a result of owning assets), Technology factor approach (overall market value based on utilization of underlying technology)

Hence, this concludes the definition of Valuation Method along with its overview.

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