Is it possible to determine whether the assets of a company have been overstated without testing every single asset for overstatement?
Is it possible to determine whether a company's assets have been overstated using only the information provided in its financial statements?
Question is provoked by the idea of measuring whether a company (or group of companies) is compliant with the prudence concept established in the Conceptual Framework for Financial Reporting (2018). Naturally, it could be extended to overstatement of revenues and understatement of liabilities and expenses.
As a rule, the financial statements present the value of the acquisition cost of the assets discounted from their depreciation, depletion or amortization. The possibility of overvaluation would be possible only in cases of fraud or non-application of impairment tests. In summary, the vast majority of assets are usually undervalued because of accounting and tax rules.
It's possible
The firm F/S i.e statement of Financial Position may not contains the provision for doubtful debts, bad debts. This is in reality will increase the figure attributed to receivables. This contravenes with the prudence concept.
Further more, the company may deceive itself by charging unreasonable, less than reasonable rate of depreciation just to boost up the value of its assets.
The issue of revaluation of assets could be another factor to assess if the assets have been overstated. The firm(s) may revalue its assets based on getting revaluation surplus just to improve the corporate image yet the actual revolution may portray the deficit in asset value on revaluation.
Therefore, audits can be conducted on SFP to see if true values or reasonable figures have been employed. The depreciation rates, amortizations have also to be audited and ensure that methods for calculating depreciation rates have been used.
Comparing assets of different periods is a good measure to detect overvaluation of assets. If a significant increase in assets is not backed by 'investing activities' in Cash Flow Statement, a possibility of overvaluation does exist.
قيمة الاصول عبر عدة فترات (تكون متتالية) تعتبر احد المعايير المهمة لقياس الوضعية المالية وهناك قيمة اخرى تسمى القيمة العادلة او القيمة السوقية لمجموعة الاصول
Compare it with market value or take the same sector firm, with equal in total assets to compare the same assets price
Dear Georgi Hristov , nice and relevant question. A good start to understand the problem is to understand possible motives to report fraudulent (see for example: 7th INTERNATIONAL CONFERENCE ON FINANCIAL CRIMINOLOGY 2015 13-14 April 2015,Wadham College, Oxford, United Kingdom Roots of Responsibilities to Financial Statement Fraud Control) and to understand under what conditions a firm is either overstated or undertstated. You should keep in mind that there are listed companies and non-listed companies. It depends on your reserach goal where to look and then how to model your question. Kind regards Rob
I like Nicholas Renaldo's answer of compare asset values with their market value and comparing the firm with the same sector firm -- but I would look to the ROA (return on assets). If the firm cannot earn a fair or superior return on their assets at fair market value (FMV) then they do not have a good reason to be in business and if they cannot earn a good return on the acquisition cost of their assets then they should go out of business. Avoid return on owner's equity as that can be plumped by leverage.
This is possible where no depreciation is considered and there is no investing activities by the firm are carried out.
You may want to take a look at the literature of Forensic Accounting. There are tools and methods that indicate that financial statements may be overstated (e.g. through overstating asset values).
You can forensic accounting tools and skills to detect whether company assets are overstated
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