ASSETS REVALUATION AND ASSESSMENT OF BANKING CAPACITY BY BANKS
ABSTRACT
The research is on assets of revaluation and assessment of borrowing capacity for selected banks in Nigeria. The study proposes that asset valuation occurs to signal available borrowing capacity via increase in collateral values and the time of increase in secured debt that the economic benefit associate with an asset revaluation will be greatest for banks when they are experiencing time of declining cash flows from operations. The study also looks at whether the incidence of valuation coincides with increase in level of secured borrowing due to the lenders demand for current value of assets offered as collaterals. Results there is significant difference between methods of valuations and declining cash flows experience from operating activities of banks. The evidence also indicate that there significant difference between asset revaluation and borrowing capacity by banks. Based on this findings, the researcher believes that there are adequate legal regulations to curtail indiscriminate assets revaluations by firms, and also assets value of a firm is the most important determinant of its borrowing capacity. Finally, assets revaluations performed by independence valuer is more reliable than that performed by the directors of the firm.
CHAPTER ONE
INTRODUCTION
1.1Background 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.
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