Naira opens window for firms’ asset revaluation

Loss-making firms in Nigeria can revalue their assets and return them to a positive net position, thanks to naira devaluation.

At an event co-organised by BusinessDay and Diya Fatimilehin & Co on Thursday, financial analysts said the current naira situation can provide a buffer for loss-making firms.

Jamiu Olakisan, partner and assurance leader, EY, said that the devaluation of the naira offers a rebound opportunity for firms’ assets.

“It has led to several companies looking at options of valuation of the assets that they carry in their financial statements,” Olakisan said at the event entitled, ‘Decoding Valuation Standards: Implications for Financial Reporting and Investments,’ in Lagos.

Nigeria’s naira, which is down by around 70 percent since last year, has seen many firms in Africa’s largest economy record materially higher net forex losses, resulting in significant loss after tax.

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Ten consumer goods firms in Nigeria incurred a combined foreign exchange loss of N987.7 billion in 2023 on the back of naira devaluation, compared to the previous year when nine of them lost around N129.8 billion, according to data compiled by BusinessDay.

This loss has led to many company shareholders’ funds closing at a negative balance.

There are two methods used in valuations of assets: the cost approach method and revaluation method.

When a company’s fixed assets such as property, plant, & equipment experience substantial changes in their market prices, the company must account for changes in value using either the cost method or revaluation techniques.

On the other hand, revaluation method of a fixed asset is the accounting process of increasing or decreasing the carrying value of a company’s fixed asset or group of fixed assets to account for any major changes in their fair market value.

Olakisan said that companies are allowed to switch between different models of accounting but such companies must disclose such to investors.

“If a company switches to the revaluation method, it means it was previously using a cost model and needs to carry out an extensive disclosure that clearly states that its policy has changed from what it used to be.”

He said that the IFRS 13 standard prohibits, though not directly, that such a company goes back to an initial model after using a new one and requires that the new method is revised frequently, usually between three and five years.

“When the revaluation method gives you a gain, it doesn’t go to the income statement but the comprehensive statement and the revaluation reserve and then it boosts shareholders’ fund,” he said.

Recently, Nestle board of directors approved a shift from historical cost methodology to revaluation methodology for valuing Property, Plants and Equipment (PP&E) on its books.

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Nestle’s change in methodology resulted in a revaluation reserve of N150.04 billion and increased the company’s property, plant and equipment value to N389.17 billion in the first quarter of 2024, from N165.38 billion in the full year of 2023.

Gboyega Fatimilehin, founding partner, Diya Fatimilehin & Co, in his opening remarks, said credible valuation reporting is essential, especially as Nigeria races towards a $1 trillion economy by 2030.

He said the seminar is timely, given the inflationary trends and macroeconomic challenges facing the country’s economy to provide a better understanding of valuation standards.

According to Nestle’s management, a revaluation exercise will be performed every three years, through an independent certified valuer, to ensure that the carrying amount of the assets do not differ materially from its fair value.

This has led CardinalStone Securities, an investment bank, projecting that Nestle’s shareholders’ fund will materially improve to a negative balance of N10.94 billion in the full year of 2024 from a negative N78.04 billion in the same period 2023 and negative N70.81 billion in first quarter 2024.

Rabiu Olowo, chief executive officer of the Financial Reporting Council, represented by Ugochukwu Obu Nwora, said that through valuation standards, investors can confidently make accurate decisions.

“We’re hopeful that by the end of August, a first of its kind valuation regulation will be out,” he said.

In a fireside session, Chris Thorne, director, Valuology, said the purpose of valuation is to give businesses insights into key decision-making, stressing that it is essential for financial stability.