What are the effects of an overvaluation of assets in the balance sheet?
August 18, 2023 | 45,00 EUR | answered by Laura Hohenwarter
Dear tax consultant,
My name is Helma Baradari and I run a medium-sized company in the hospitality industry. In recent years, we have significantly expanded our assets and invested in new machinery, vehicles, and properties. In doing so, we may have overvalued some assets and I am concerned about the impact of this overvaluation on our balance sheet.
The current situation is as follows: Our balance sheet shows the assets at a higher value than they could actually achieve on the market. I fear that this overvaluation could mislead stakeholders and potentially put our company in financial difficulties if the assets actually have to be devalued.
Therefore, my question to you is: What are the effects of overvaluing assets in the balance sheet? How can I determine if and to what extent assets in my balance sheet are overvalued? And what steps can I take to ensure a realistic valuation of my assets and minimize potential risks?
Thank you in advance for your help and support.
Kind regards,
Helma Baradari
Dear Mrs. Baradari,
Thank you for your inquiry regarding the overvaluation of assets in your balance sheet. Overvaluation of assets can indeed lead to various negative effects, both for the company and stakeholders. On one hand, overvaluation can distort the company's financial position as the true value of the assets is not accurately reflected. This can cause investors and creditors to draw incorrect conclusions and misjudge the company's risk.
Furthermore, overvaluation of assets can also lead to tax issues as the company may report higher profits and thus have to pay higher taxes. Additionally, overvaluation can put the company in financial trouble if the assets are potentially devalued, leading to a loss of equity.
To determine whether and to what extent assets in your balance sheet are overvalued, I recommend conducting a comprehensive valuation of the assets. This can be done by involving external appraisers or experts who can determine the true market value of the assets. Additionally, regular depreciation should be carried out to ensure that assets are recorded at realistic values in the balance sheet.
To ensure a realistic valuation of your assets and minimize potential risks, it is important to regularly review the valuation methods and procedures. Additionally, ensure that assets are regularly assessed for impairment and make necessary write-downs to ensure a realistic representation in the balance sheet.
I hope this information is helpful and I am happy to assist if you have any further questions.
Sincerely,
Laura Hohenwarter
