Ten consumer goods firms in Nigeria incurred a combined foreign exchange loss of N987.7 billion in 2023 due to naira devaluation, a significant increase from the N129.8 billion loss reported by nine of these firms in the previous year, according to data compiled by BusinessDay. This substantial loss has pushed many companies’ shareholders’ funds into negative balances.
Companies have two primary methods for asset valuation: the cost approach method and the revaluation method. When a company’s fixed assets, such as property, plant, and equipment (PP&E), experience substantial market price changes, it must account for these changes using one of these methods.
Recently, Nestle’s board of directors approved a shift from the historical cost methodology to the revaluation methodology for valuing its PP&E. This change resulted in a revaluation reserve of N150.04 billion and increased the company’s PP&E value to N389.17 billion in the first quarter of 2024, up from N165.38 billion at the end of 2023.
Gboyega Fatimilehin, founding partner of Diya Fatimilehin & Co, emphasized the importance of credible valuation reporting, especially as Nigeria aims to become a $1 trillion economy by 2030. He highlighted the seminar’s timeliness in addressing inflationary trends and macroeconomic challenges, providing a better understanding of valuation standards.
Nestle’s management has indicated that a revaluation exercise will be conducted every three years by an independent certified valuer to ensure the carrying amount of the assets accurately reflects their fair value. CardinalStone Securities, an investment bank, projects that this revaluation will significantly improve Nestle’s shareholders’ fund to a negative balance of N10.94 billion by the end of 2024, compared to a negative N78.04 billion in 2023 and a negative N70.81 billion in the first quarter of 2024.
Rabiu Olowo, CEO of the Financial Reporting Council, represented by Ugochukwu Obu Nwora, stated that valuation standards are crucial for investor confidence and accurate decision-making. He announced that a first-of-its-kind valuation regulation is expected to be released by the end of August.
In a fireside session, Chris Thorne, director of Valuology, stressed that the purpose of valuation is to provide businesses with insights for key decision-making, which is essential for financial stability. He explained that valuation measures assets or liabilities and informs investment decisions, while standards ensure consistency. Thorne also noted that recent global changes in interest rates and exchange rates necessitate market revaluation to assess associated risks.
Thorne concluded that there is no single best valuation method. Valuers must understand market dynamics and consider the risks involved to choose the most appropriate approach.
