Naira’s Fall Provides Valuation Benefits for Struggling Companies

The decline of the Nigerian naira has emerged as an unexpected lifeline for many loss-making firms in Africa’s largest economy.

At an event co-organised by BusinessDay and Diya Fatimilehin & Co on Thursday, financial analysts highlighted that the current naira situation can provide a buffer for struggling companies, allowing them to revalue their assets and potentially return to a positive net position.

Jamiu Olakisan, partner and assurance leader at EY, explained that the devaluation offers a unique rebound opportunity for firms’ assets.

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

Financial Relief Through Asset Revaluation

The significant devaluation of the naira has resulted in many firms recording materially higher net forex losses, which has led to significant losses after tax.

Ten consumer goods firms in Nigeria, for instance, incurred a combined foreign exchange loss of N987.7 billion in 2023 due to the naira’s devaluation, a stark increase from the previous year’s N129.8 billion.

Olakisan explained that the devaluation provides companies with the opportunity to revalue their fixed assets, such as property, plant, and equipment, which can significantly alter their financial standing.

“When the revaluation method gives you a gain, it doesn’t go to the income statement but to the comprehensive statement and the revaluation reserve, boosting shareholders’ funds,” he noted.

Methods of Asset Valuation

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

The cost approach considers the market price changes of fixed assets, while the revaluation method involves adjusting the carrying value of an asset to reflect its fair market value.

Companies switching to the revaluation method must disclose this change to investors and frequently update their valuations, typically every three to five years.

Case Study: Nestle Nigeria

Nestle Nigeria serves as a prominent example of this strategy. The company’s board of directors recently approved a shift from the historical cost methodology to the revaluation methodology for valuing its Property, Plants, and Equipment (PP&E).

This change resulted in a revaluation reserve of N150.04 billion, increasing the company’s PP&E value to N389.17 billion in the first quarter of 2024, up from N165.38 billion in 2023.

This move has prompted CardinalStone Securities, an investment bank, to project that Nestle’s shareholders’ fund will significantly improve to a negative balance of N10.94 billion by the end of 2024, compared to a negative N78.04 billion in 2023.

Industry Outlook

Gboyega Fatimilehin, founding partner of Diya Fatimilehin & Co, stated the importance of credible valuation reporting, especially as Nigeria aims to become a $1 trillion economy by 2030.

“The seminar is timely, given the inflationary trends and macroeconomic challenges facing the country’s economy, providing a better understanding of valuation standards,” he said.

Rabiu Olowo, CEO of the Financial Reporting Council, represented by Ugochukwu Obu Nwora, highlighted that new valuation regulations would be introduced soon.

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

In a fireside session, Chris Thorne, director of Valuology, reiterated the importance of valuation in giving businesses insights into key decision-making, stressing its essential role in financial stability.

He noted that there are no universally best valuation methods, as valuers must understand their market dynamics and consider the associated risks.

As Nigeria navigates its economic challenges, the devaluation of the naira, though initially a setback, has opened doors for struggling companies to stabilize and potentially thrive through strategic asset revaluation.