CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Asset valuation has always been a major subject of studies accounting standards, as the issue is closely related to measurement and disclosure of corporate income. Prior research has found support for contracting, political cost and information asymmetry explanations for management’s decision to revalue non current assets (Cotter & Zimmer, 2005). They further argued that the economic benefits associated with asset revaluation by firms are greatest for such firms when they are experiencing times of declining cash flows from operations. Evidence also indicates that firms are more likely to record re asset revelation when they intend increasing their secured borrowings and that most non-year end revaluations emanate directly from contracting with lenders (Cotter & Zimmer, 2005).
According to Osanyame (2006), when a request for, a loan is received, it is important to ascertain the credit worthiness of the borrower, i.e. the firm memorandum and articles of association need to be pursued to see if there is any precluding clauses or limitations on borrowing. The importance of this examination has been covered in law relating to banking in which a banker has to be knowledgeable. The failure by banks in the assessment of the borrowing capacity of firms have been a major stumbling block for the industry. Many banks have work under, due to this singular act which leads to the granting of loans to firms disgusting their financial reports with grand figures of revalued asset so as to increase their borrowing capacity. The banking sector of the Nigeria economy has witnessed many banks going under most of which has been their inability to recoup loans borrowed to firms and interest from such. The proper assessment of the borrowing capacity of firms need to be ascertained by banks, bearing in minds the revalued figures of the assets stated in the financial reports and their actual current market values.
1.2 Statement of Problem
It has often been argued that, in order to continually uphold the issue of reliability and relevance, the financial statement must show the true financial position of an entity. In a bid to ensure that these characteristics are achieved, the need for revaluation of assets became necessary. Also, the value of assets available tends to affect the borrowing capacity f firms.
1.3 Research Questions
The following are the research questions of the study;
i. Do firms undertaking asset revaluation most likely to experience decline in cash flow operation than firms that do not revalue?
ii. How does the revaluation of assets undertaken with the main aim of boosting the firm borrowing capacity? iii. Is there adequate legal regulation to curtail indiscriminate asset revaluation by firms?
iv. How is the asset value of a firm the most important determinant of its borrowing capacity?
v. To what extent is the assets revaluation performed by independent value reliable than the performance by directors?
1.4 Objective of the Study
The objectives of the study are stated below;
i. To ascertain if the firms undertaking asset revaluation most likely to experience decline in cashflow operation than firms that do not revalue.
ii. To ascertain if the revaluation of assets is the main aim of boosting the firm borrowing capacity.
iii. To examine if there is adequate legal regulation to curtail indiscrimination of asset revaluation by firms.
iv. To ascertain if the asset value of a firm the most important determinant of its borrowing capacity.
v. To determine to what extent the assets revaluation performed by independent value reliable than the performance by directors.
1.5 Statement of Hypothesis
Hypothesis One
HO: Firms undertaking asset revaluation are not likely to be experiencing declining cashflow operation than firms that do not revalue.
HI: Firms undertaking asset revaluation are likely to be experiencing declining cashflow operation that firms that do not revalue.
Hypothesis Two
HO: The revaluation of assets is not undertaken with the main aim of boosting the firm borrowing capacity.
HI: The revaluation of assets is undertaken with the main aim of boosting the firm borrowing capacity. Hypothesis three
HO: There is no adequate legal regulation to curtail indiscriminate asset revaluation by firms.
HI: There is adequate legal regulation to curtail indiscriminate asset revaluation by firms.
Hypothesis Four
HO: Asset value of a firm is not the most important determinant of its borrowing capacity.
HI: Asset value of a firm is the most important determinant of its borrowing capacity.
Hypothesis Five
HO: Assets revaluation performed by independent value are not reliable than the performance by directors.
HI: Assets revaluation performed by independent value are reliable than the performance by directors.
1.6 Significance of the Study
This research work will be paramount use to the following groups:
Lenders: The research work centers are how assets revaluation aects the borrowing capacity of firm. It seeks to unveil the critical avenue through which assets revaluation tends to aect the borrowing capacity of a firm. It explains the need for lenders to further assess the cash flow from operating activities in analyzing the borrowing capacity of firms. Business organization: Due to the sensitive nature of assets revaluation, it is necessary or firms to understand the underlying mechanism for assets revaluation, it timing, benefits and problems. This research work, thus provides a rich source of such information. It also brings to the awareness of business organization. The legal regulations put to prevent indiscriminate revaluation by management. Shareholders/Stakeholders: Business organizations are managed on behalf of its shareholders/stakeholders. The separation of ownership and control of business organization necessitates the need to put in place mechanism to mitigate. Incentive problems and conflicts interest between owners and managers of Business organization. The shareholders are therefore required to have a balanced understanding of the concept of assets revaluation as its affects the borrowing capacity of the firm. The reason is that, reserve.
1.7 Scope of the Study
The concept of assets revaluation is of universal importance to both the accounting field and other social science courses, Its effects on the firm’s financial position and ability to obtain debt financial (financial leverage) makes on issue that cannot be neglected. This research work is designed to explain the concept of assets revaluation and assessment of borrowing capacity (the need for assets revaluation,, the types of revaluation-their benefit and setback, the legal and other regulations governing assets revaluation, the factors affecting asset revaluation and assessment of borrowing capacity and the effect of financial leverage and cash flow on the borrowing capacity of a firm.
1.8 Limitation of the Study
The major limitation of this study is the constraint of time and finance as the study was conducted amidst tight schedule of both strict budget and time constrains in which many wants compete for limited resources.
1.9 Definition of Terms
Asset Valuation: An asset valuation shows that estimating market value of a financial asset or liability.
Borrowing Capacity: The ability of a firm to borrow funds and pay back such at the stipulated time with interest without experiencing any decline in cash flow.
Safety: This shows the bank consideration of its lending decision.
Liquidity: Is the ability of the organization to meet short term maturity obligations.
Fair Market Value: Is the cash price an item would sell for between a willing buyer and willing seller assuming they both have knowledge of the relevant facts and they have no compulsion to buy or sell.
