As AMC Agents we often wonder why the property valuation in the balance sheet is so out of date and generally very low. Historically the reason has come down to the cost of constantly updating it as land values have increased year on year. However now that we are seeing more stable property prices (for land buildings and houses) and following a period of significant increase, it is worth updating the balance sheet value.
Some would ask what the point of a balance sheet is anyway. The answer is that is provides an annual snap shot of the net worth of the business, so the trend year on year shows how a business is performing and growing. Property and stock values are two possible artificial elements and whilst stock is difficult to correct, the property values are more straight forward.
There are several good reasons to do this;
- To avoid a negative balance sheet– With farm debt increasing nationally, there is a risk that some businesses will end up with a negative balance sheet. This implies more debt than assets which is very unlikely but doesn’t look good. A corrected property value on the positive or assets side of the balance sheet should remove this problem.
- Better farm management – For some it helps to see the value of the assets more clearly. An awareness of the value of the key assets allows an assessment of how they are performing. Therefore more educated decisions can be made on restructuring, disposal or strategic purchases of property assets.
- Banks and lenders like to see a strong balance sheet – For any business with borrowing, the balance sheet provides the lender with a quick assessment of the net worth of the business. Most of the time the manager will have to ask for a rough valuation of property owned, but a more up-to-date balance sheet provides this instantly.
- Understanding ownership – The assets identified on the balance sheet are business assets. If they are not on the balance sheet they are not owned by the business. In times of dispute this identification is crucial.
So following significant increases and in a time or what looks like more stable land prices updating this part of the balance sheet seems a prudent move. It is worth checking with your accountant and possibly solicitor to establish what property should be on the accounts. Sometimes property is outside the business, but there are normally inheritance and capital gains tax advantages to including property in the business so this is becoming more common.
We are able to provide cost effective farm valuations so if this is of interest please do give us a call for a quote.