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COMMUNITY UPDATE

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Asset Revaluation

As we draw closer to the end of a difficult and challenging financial year, revaluation of assets will be a key concern for the board. But as assets are written down, balance sheets repaired and operations consolidated to cut costs, key questions need to be asked about what impact this process will have on organisations in the longer-term.       

John Allkins, Non-executive Director for Intec offers this advice to businesses going through the asset revaluation process: "The markets expect that asset valuations, both tangible and intangible, will need to be reviewed. But the consequences, both external and internal, need to be thought through as companies engage in this exercise. Marking to market is fine as a concept if the market is one where real trades, as opposed to financial bets, are taking place."

John Allbrook, Global CEO for GoIndustry, has this to add, "There are so many conflicting factors for business leaders to take into account when reviewing asset values. No business wants to write down, or write off, assets unnecessarily. No business wants to waste investor cash. But every successful business will take tough decisions to survive. At this point in the cycle, prudent financial management and key decision-making to clean up the balance sheet and prepare for what comes next are vital." 

There will certainly be a desire from companies to revalue assets as soon as possible, not least to reset expectations and begin concentrating on future growth and opportunities. Mike Barley, Managing Director for Close Asset Finance, has this advice: "FDs will wish to clear as much damaging news as possible during this dreadful economic year including any required asset value reductions. If there is any good news, it's that such devaluations do not damage cash resources, which will be the highest priority for the foreseeable future. Many difficulties will follow including a reduced capacity for borrowing based on lower reserves. For the optimists, there are very early signs that the worst could be over by the end of 2009, but it's a brave person who plans on that basis."

As is to be expected in the current recession, media coverage to date has focused predominately on the devaluation of assets in the finance and property markets. But what about industries like energy and manufacturing? What impact will revaluation have on these sectors as companies align their balance sheets? John Allbrook, recently completed an asset review of a global automotive supplier which had a wide range of impaired tangible and intangible assets. He points out, "most manufacturing companies have many productive assets that are no longer used profitably, some assets are mothballed and often whole plants are closed."

And what impact will this have in the long-term? Clearly boards need to think about the impact of revaluation on things like innovation and growth. Although access to funding is more difficult than ever, we should, perhaps, be careful not to overstate the reduction in borrowing capability that revaluing assets creates. Allbrook adds, "The deepening recession is driving shrinking revenues and falling profits. This will have a detrimental effect on investment and innovation of all types. This is not caused by impairment testing and writing down asset values, it's just the lack of cash, risk aversion and the process of becoming used to the new world we live in. Once business has the confidence that we have reached the bottom of the cycle, then those that survive will seek new opportunities for growth and expansion." 

Leaders should use the process of asset revaluation as an opportunity to reassess risk and the business model so that innovation and investment can still be pursued. As Stephen Gregory, Leader for Financial Services for Ernst & Young Business Risk Services says "The financial crisis has caused organisations to re-evaluate their exposure to financial risks. The volatility in today's market and resultant asset write-downs have caused organisations to seriously rethink their models and key assumptions, in many cases, undertaking a detailed bottom-up review of their entire financial position to flush out potential issues and find their largest exposures."

Asset Revaluation Insights

We have some great Insights covering this topic including Protecting Your Assets - Opportunities in Adversity and The Changing Face of Asset Management, a Write-up from a Criticaleye discussion on this subject.

Matthew Blagg, CEO, Criticaleye