Why Are Financial Instruments Valuation Important For Your Business?

Both tangible and intangible benefits play an integral role in business valuation in Malaysia

 

Financial instruments are considered a part of the intangible assets that can provide significant future benefits by providing a claim to future cash. 

 

In simpler terms, financial instruments are tradeable assets that also represent a legal agreement or right to the monetary value of an asset or entity. 

 

There are many different aspects of financial instruments valuation considered by audit firms in Malaysia during the business valuation process to make sure a correct value is obtained. 

 

Keep reading to learn about the major types of financial instruments and the significance they hold for businesses. 

 
 

Classification of Financial Instruments

According to financial standards, it is possible to classify financial instruments into two major categories:

1. Cash Instruments

Cash instruments are a form of tradeable financial instrument whose values are directly associated with the financial markets. It is also possible to divide cash instruments into two further types:

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2. Equity Instruments

These cash instruments are the ones that represent the ownership of a particular asset, such as:

 

  • Common Shares represent the partial ownership of the company. 
  • Preferred Shares represent an equity interest in a firm and do not provide voting rights to the company owners. In such a situation, the investor is typically entitled to get a certain number of fixed dividends as per the legal agreements. 
  • Private Equity is the companies operating as partnerships or private limited companies. Such organizations do not have publicly traded shares. Private equity funds and venture capital funds typically fund such companies. 
  • Exchange Traded Funds (ETFs) are passive funds that represent the stock market of a country. 
 

Debt Instruments

As the name suggests, debt instruments are the debt or loans given by an investor to the owner of the company or a specific asset. A wide range of bonds can be issued in the debt capital markets, such as convertible bonds, Eurobonds, and many others. 

 

When you hire an audit firm in Malaysia for financial instruments valuation, it will consider all of these different types of financial instruments to make sure the entire business valuation process is completed efficiently.

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Derivative Instruments

Derivatives are investments that are made on the basis of underlying assets. The purpose of the derivative contracts is to make sure that a company is able to buy or sell the underlying products at a later stage. 

 

The following are the major types of derivative instruments:

  • Forward Contracts provide the holder the obligation to buy or sell an instrument at a certain price at a specific price. 
  • Futures Contracts are also considered forward contracts, but they are traded on organized exchanges. Future contracts involve legal obligations to buy or sell a standard quantity at a predetermined price. 
  • Swaps are legal agreements that involve two parties in which agreements are made related to periodic payments. 
  • Options are also legal contracts in which the option seller provides a right to enter into a transaction with the seller at a later date. 
 

Financial Markets

Financial markets are strongly associated with financial instruments and financial instruments valuation procedures. A financial market is a market in which financial instruments are exchanged or traded. The three important functions of a financial market are:

Price Discovery

Price discovery refers to the transaction between buyers and sellers of financial instruments. The cost of the traded asset is typically decided after thorough negotiation.


These functions of a financial market are important to determine the availability of funds for those who are lending money or investing in a certain company.

Liquidity Function

The purpose of the liquidity function is to facilitate investors in selling a financial instrument.


The liquidity function is also defined as the measure of the ability to sell a particular asset at a fair market value. It is not possible for an investor to hold a financial instrument for a long time without liquidity

Reduction of Transaction

A reduction of transaction costs is required to deal with the changes in the costs of financial instruments.


Changing economic conditions play an integral role in the trading of different types of financial instruments and overall business valuation in Malaysia. Therefore, such functions exist to streamline the procedures as much as possible.

In Closing

Financial instruments valuation is definitely a challenging and complicated procedure that should be handled by experts to ensure accuracy in business valuation procedures. 

 

In this regard, professional audit firms in Malaysia can help companies go through business valuation and financial instruments valuation quickly and smoothly.