In the United States, and the rest of the world, for that matter, we are moving towards a fair value basis of financial reporting and accounting.
As examples of the U.S. GAAP requirements for valuation, look at such areas as asset impairment, IPRD, stock options for compensation, lease residuals, financial instruments and many types of liabilities for which the exact amount may be a matter of valuation judgment.
Valuation principles are simple and easily understood. Determining which of many possible appraisal principles and methodologies is most appropriate in a particular situation is not so clear.
Should we use as the premise of value the assumption that the assets would be sold, or do we look at replacement value, assuming that the assets will continue in use? Do we accept management’s forecast and assumptions uncritically, or do we question them closely sometimes requiring changes in such management forecasts? Do we utilize the market comparable approach to value, or is itmore appropriate to utilize the cost approach?
Both for balance sheets and the determination of periodic income, the use of value information is becoming an increasingly important element
Answers to these fundamental valuation questions are often not explicitly spelled out in the final valuation report, and therefore a reader of the report may not realize what the truly key questions should be.