Accounting Valuation: What it is, How it Works

What Is Accounting Valuation?

Accounting valuation is the process of valuing a company's assets and liabilities in accordance with Generally Accepted Accounting Principles (GAAP) for the purposes of financial reporting.

Understanding Accounting Valuation

Several accounting-valuation methods are used while preparing financial statements in order to value assets. Many valuation methods are stipulated by accounting rules, such as the need to use an accepted options model to value the options that a company grants to employees. Other assets, such as real estate, are valued simply by the price paid. Typically, fixed assets are valued at the historical price while marketable securities are valued at the current market price.

Accounting valuation is critical to financial analysis in order to generate accurate and reliable financial statements. Analysis of this valuation is just as important as the valuation itself.

Some assets such as real estate are carried at cost less depreciation, and can be carried on the balance sheet at values far from their true value. Securities the firm owns for its own investment portfolio versus trading will have their own rules for valuation as well, as will bonds held for investment or trading.

The updated quarterly or yearly accounting valuation information is made available in the form of financial statements and can be found in the investor relations area of most publicly trading firms' websites.

Actuarial Valuation vs. Accounting Valuation

An actuarial valuation is a type of appraisal of a pension fund's assets versus its liabilities, using investment, economic, and demographic assumptions for the model to determine the funded status of a pension plan. In many ways, actuarial value is the equivalent of accounting value in the context of pension fund accounting.

The assumptions used in actuarial valuation are based on a mix of statistical studies and experienced judgment. Since assumptions are often derived from long-term data, unusual short-term conditions or unanticipated trends can occasionally cause deviations from forecasts.

Actuarial value is also used to refer to the percentage of total average costs for covered benefits that will be paid by a health insurance plan. Under the Affordable Care Act (ACA), health plans available on the Health Insurance Marketplace are divided into four "metallic" tier levels—Bronze, Silver, Gold, and Platinum—based on the actuarial values.