ACCOUNTING VALUATION

8/14/2019 ACCOUNTING VALUATION

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WHAT IS VALUATION? (1)

Valuation is a highly educated mental

process aiming to (having as purpose):Setting a value (or a monetary level) on

a certain element(asset, liability, equity,

company, business)The act of appraisal

The estimation or acknowledgement of

the worth of something


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Valuation is the process of estimating the market value of afinancial asset or liability. Valuations can be done onassets (for example, investments in marketable securitiessuch as stocks, options, business enterprises, orintangible assets such as patents, trademarks, know-how,software, databases, and goodwill) or on liabilities (e.g.,

bonds issued by a company). Valuations are required inmany contexts including investment analysis, capitalbudgeting, merger and acquisition transactions, financialreporting, taxable events to determine the proper tax

liability, and in litigation.


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Valuation is a technique of the

Financial Accounting Method

Accounting Valuation

is preceeded by:

(Business) Analysis and Diagnosis

of the element to be valued


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What is Value? (1)

Value in Economy

Here are some meanings of Value in Economy:

Relative worth or importanceMonetary or material worth, as in commerce

The worth of something in terms of somemedium of exchange

Equivalent worth in money, material orservice

Estimated or assigned worth


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What is Value? (2)

Value in Accounting

Value is a complex notion, including:

Intrinsic Value:3. reflects the objective, hard, visible, tangible,

concrete, verifiable part of an asset, a liability, abusiness or a company.

4. inspires and generates patrimonial valuationmethods, based on costs of incorporatedfactors (labour, energy, materials and

information) in the element to be valued.


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What is Value? (3)

Value in Accounting

Utility Value:

represents the extension of users want/needfulfillment and satisfaction, it is highlysubjective.

reflects the subjective,soft, invisible, hardly

verifiable or provable part of an asset, a liability,a business or a company.

generates non-patrimonial valuation methods,

such as Discounted Cash Flow.


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What is Value? (4)

The Market Value (as a form of Fair Value)

reconciles the two types of value

CONCLUSION:

Value and Valuation

are core subjects and major concerns inAccounting


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What is Valuable?

Having considerable monetary worth

Of considerable use or importance

Having qualities worthy of esteem


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Scopes (Purposes) of Valuation

Accounting evidence and reporting (A True

and Fair View on Patrimony) Taxation of Properties

Mergers and Acquisitions of companies

Sale/Purchase of a Business or parts of it

Association / Partnership Contracts (Deeds)

Stock Exchange Listing and Transactions

Litigations


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What do we valuate? (1)

We valuate everything a company owns or

owes, and the company as a whole:Assets (tangible and intangible, fixed and

current, investments, rights, receivables)

Liabilities (debts, payables, obligations,loans)

Equity (owners shares or capital)

Income (revenue, gains/profits/benefits)


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What do we valuate? (2)

Expenses, costs

Securities (stocks/shares, bonds,derivatives - options, futures)

Businesses

CompaniesActivitiesAdvertising campaigns, etc.


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The Necessity of


According to IAS/IFRS Framework, a financial

statement element (assets, liabilities, equity,income, expenses) should be recognized in thefinancial statements only if:

It is probable that any future economic benefit

associated with the item will flow to or from theentity; and:

The item has a cost or value that can bemeasured with reliability.


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Valuation

and Accounting Policies (1)

Accounting policies are the specific

principles, bases, conventions, rules andpractices adopted by an entreprise inpreparing and presenting financial

statements.Accounting policies should be chosen in

order to comply with IASs and IFRSs.


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Valuation

and Accounting Policies (2)

Accounting policies should be developed so that

information provided by the financial statements is:Relevant for the decision-making needs of users

Reliable: neutral (free from bias), prudent,complete in all material aspects, reflect the

economic substance of events and transactionsand not merely their legal form, and offer a Trueand Fair View on patrimony, financial results andfinancial position of the company.


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Valuation and Accounting

Principles (Conventions)

Prudence: for reasons of prudence, betweenbook value and present value, the least of thetwo will be selected

Adequacy: valuation methods should be

adequate to (consistent with) the nature of thevaluated element


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BUSINESS VALUATION

BUSINESS VALUATION

(Evaluare economico-financiara)includes:


To valuate = a evalua dpdv economic si contabil

Valuation (process) = (procesul de) evaluare

Valuer= evaluator


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Synonyms for Valuation (1)

To appraise = a evalua, a determinavaloarea economica, monetara, etc.Apparaisal = evaluare in economieAppraiser = pretuitor, evaluator:

American Society of Appraisers


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To assess = a aprecia, a estima oficial valoarea

unei proprietati in scop de impozitareAssessment = estimare oficiala

Assessor = persoana care face evaluari deproprietati in scop de impozitare:

Scottish Assessors Association


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To estimate = a estima, a aproxima,a evalua global

Estimation = estimare, aproximare


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To evaluate = a evalua acte, probe in

justitie, situatii, etc.Evaluator = evaluator de acte, probe in

justitie, situatii, etc.

World Evaluation Service

for academic documents


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To approximate = a aproxima

Approximation = aproximare


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To survey = a analiza in amanunt, a

inspecta, a expertiza, a evalua (oproprietate)

Surveyor = inspector evaluator:

The Royal Institution of Chartered

Surveyors


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To valorize = to maintain the value or the price

(of a commodity), especially by subsidies or thegovernments purchase at a fixed price.

Valo(u)r = boldness or determination in facingdanger; worth.

Valorous = to be worth.


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Pricing is the manual or automatic process of

applying prices to purchase and sales orders,based on factors such as: a fixed amount,quantity break, promotion or sales campaign,specific vendor quote, price prevailing on entry,

shipment or invoice date, combination ofmultiple orders or lines, and many others.Automated systems require more setup andmaintenance but may prevent pricing errors.



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Pricing is one of the four ps of the marketing

mix. The other three aspects are product,promotion, and place. It is also a key variablein microeconomic price allocation theory.Price is the only revenue generating element

amongst the 4ps,the rest being cost centers.


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ACCOUNTING VALUATION

Norms, Regulations and Good Practice (1):

International Accounting Standards (IAS), issuedby International Accounting StandardsCommittee (IASC) until April 2001

International Financial Reporting Standards(IFRS), issued by International AccountingStandards Board (IASB) after April 2001


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International Valuation Standards (IVS), includingGuidelines, issued by International ValuationCommittee

Best Practices (including Professional Ethics andDeontology) created and developed by biginternational consultancy companies (Big Four,etc.) and promoted by professional bodies as

Guidelines and Codes


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Tradition(Rules of Thumb), especially in GreatBritain, United States, Germany and France

On this subject, an article is posted and can bedownloaded for free from:

http://www.ucdc.info/cd/cd_profil.php?cid=1064 asMetodele rapide de evaluare

OMFP nr. 1.752/2005 (Monitorul Oficial nr. 1.080 /30.11.2005), completed and updated
http://www.ucdc.info/cd/cd_profil.php?cid=1064http://www.ucdc.info/cd/cd_profil.php?cid=1064


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Romanian Professional Bodies

in Valuation

Asociatia Nationala a Evaluatorilor din

Romania (ANEVAR)Corpul Expertilor Contabili si Contabililor

Autorizati din Romania (CECCAR)

These professional bodies issue technicalnorms for valuation and promote goodpractices, ethics and deontology


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Bases for Accounting Valuation

- Types of Value (1)

Historical cost or book value: purchase or

production costplus other expenses (freight,installation, provision, non-deductible taxes)

Current (present, actual) cost: updated,nowadays historical cost lessdepreciation or

amortizationNet realizable (settlement) value: sale price

less sale expenses

Present (market) value, a variety of Fair Value


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- Types of Value (2) Fair Value

Whenever possible, financial statement elements should be valuated ata Fair Value. Market Value is the most desirable variety ofFairValue:

Fair value, also called fair price, is a concept used infinance and economics, defined as a rational andunbiased estimate of the potential market price of a good,service, or asset, taking into account such factors as:

1. Relative scarcity

2. Perceived utility (economist's term for subjective valuebased on personal needs)

3. Potential risk/return characteristics (i.e., for a tradableasset)

4. Replacement costs, or costs of close substitutes5. Production/distribution costs, including a cost of capital


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- Types of Value (3) Active Market

Market Value is the most desirable variety ofFair Value.

Market Value is accepted only if allActive Marketconditions exist:

The items traded in the market are homogeneous;

Willing buyers and sellers can normally be found at anytime; and:

Prices are available to the public.


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- Types of Value (4) Market Value

Market value is the estimated amount for

which a property should exchange on thedate of valuation between a willing buyerand a willing seller in an arms-lengthtransaction after proper marketing whereinthe parties had each actedknowledgeably, prudently, and withoutcompulsion.


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- Types of Value (5) Value Added

Value added: difference, at each stage of

production and trade, between the price offinal product and the cost of all factors

purchased to make the product. Valueadded includes: wages, amortization,interest, provisions, taxes and fees, profit.


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Value/Cost

of Inventories as Input (1)

Cost of inventories comprise:

Purchase costs, such as the purchase price(including transportation fee) and import charges

Cost of conversion: direct labour andproduction overheads including variable

overheads and fixed overheads allocated atnormal production capacity

Other costs, such as design and borrowing

costs


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Value/Cost

of Inventories as Input (2)

The cost of inventories exclude:

Abnormal amounts of wasted materials,labour and overheads

Storage costs, unless they are necessaryprior to a further production process

Administrative overheads

Selling costs


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Value/Cost

of Inventories as Output (1)

The cost of inventories that are not ordinarilyinterchangeable and those produced and

segregated for specific projects are assignedby specific identification of their individualcosts

The cost of other inventories is assigned byusing either of the following cost formulas:

c. Weighted Average Cost

d. FIFO: First In First Out

e. LIFO: Last In First Out


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Value/Cost


The following techniques can be used to measurethe cost of inventories if the results betterapproximate cost:

Standard Cost:

3. Normal levels of materials, labour and actual

capacity should be taken into account4. The standard cost should be reviewed regularly

in order to ensure that it properly approximates

actual costs.


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Value/Cost


Retail Method:

1. Sales value should be reduced by gross marginto calculate cost.

2. Average percentage should be used for eachhomogeneous group of items.

3. Marked-down prices should be taken intoconsideration.


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Value/Cost


Net Realisation Value (NRV) is the estimatedsale price less the estimated cost of completionand costs necessary to make the sale. Theseestimates are based on the most reliable

evidence at the time the estimations are made.


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Valuation of Goodwill (1)

Post-factum = Net Acquisition Value (bookvalue, recognised by the market = Market Value):

Aquisition Price of Company

less

Value of Identifiable Assets

Ante-factum (income capitalisation approach) =Discounted Cash Flow (DCF): used only for saleof the business or forecasting purposes, not for

bookkeeping.


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Discounted Cash Flow (DCF) Method isderived from the future value formula forcalculating the time value of money andcompounding returns, or the capacity of abusiness to create over-profit:

FV = PV (1 + k)^nFV = Future Value, aftern years

PV = Present Value

n = number of years of period considered


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k = Discount Rate, which includes:

2. Risk-free long-term government bond rate3. Long-term equity risk premium

4. Small company risk premium (where applicable)

5.

Specific company risk premium6. An additional risk premium based on the

appraisers judgement of specific company risks


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Valuation of Equity

Net Present Value (NPV): E = A L (E = Equity, A = Assets, L= Liabilities)

It representsthe value of a companyas awhole, calculated by accountants.

Market Value (at the Stock Exchange, for listedcompanies).


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Value and Price

Value is an opinion of an expert and merely aninterval, it is a base for commencement of bids,auctions and/or negotiations.

Price is the final and monetary expression of value

and it is fix, precise, firmly determined, stipulatedin an offer or in a contract as a result of bids /auctions, negotiations, commodity exchangetransactions, etc.


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Other Methods of Valuation (1)

Liquidation Value = The estimated

amount of money that an asset orcompany could quickly be sold for, suchas if it were to go out of business. If theliquidation value per share for a company

is less than the current share price, then itusually means that the company shouldgo out of business (or that the market ismisvaluing the stock), although this is

uncommon.


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Rule of Thumb = A rule of thumb is a principlewith broad application that is not intended to bestrictly accurate or reliable for every situation. Itis an easily learned and easily applied procedurefor approximately calculating or recalling some

value, or for making some determination. Itcomes from tradition, experience and localmarket conditions.


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4 applications of The Rule of Thumb

method: Fast food franchise = 50% of annual sales

Heating, ventilation & air conditioning contractors= 2 times annual cash profits

Mail order business = 50% of annual sales +inventory

M o t e l = $20,000 times number of rooms.


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Moments

in Accounting Valuation

Input/Entry into Patrimony (investments asowners equity, purchase, conversion/production,subsidy)

Inventory (periodical complete factual listing /

check of patrimony items assets and liabilities) End of the year, for financial reporting purposes

Output/Exit from Patrimony (sale, sponsorship,

shareholder withdrawal, etc.)


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Pricing System

Price is the unit of measurement for value

Any price includes cost and profit of seller Types of prices on the chain of distribution:

4. Manufacturers price

5. Whole sale price

6. Retail price

7. Export/Import price

A previous price is a cost for the next link.


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Thank You,for Your Kind and Understanding

Attention!


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BIBLIOGRAPHY (2) International Accounting Standards Board: International Accounting

Standards/International Financial Reporting Standards, London UK, 2007,www.iasb.org;

International Valuation Standards Committee: International ValuationStandards, Eighth Edition, London UK, 2007, www.ivsc.org;

Low, Jonathan; Cohen Kalafut, Pam: Invisible Advantage: How IntangiblesAre Driving Business Performance, Cap Gemini Ernst & Young, Cambridge Massachussetts, USA, 2002;

Needles Jr., Belverd E.; Anderson, Henry R.; Caldwell, James C.: Principiilede baz ale contabilitii(ediia a cincea), Editura ARC, Chiinu, RepublicaMoldova, 2001;

Random House Websters College Dictionary, New York - NY, USA, 2003;

Siegel, Joel G.; Shim, Jae K.: Dictionary of Accounting Terms, Barrons

Business Guides, Hauppauge New York, USA, 2005;
http://www.iasb.org/http://www.ivsc.org/http://www.ivsc.org/http://www.iasb.org/


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BIBLIOGRAPHY (3) Smith Linton, Heather: Business Valuation, Adams Media Publishing House,

Avon Massachussetts, USA, 2004;

Trac, Margareta: Evaluri contabile patrimoniale, Editura TribunaEconomic, Bucureti, 1998;

Ulrich, Dave; Smallwood, Norm: How Leaders Build Value, John Wiley &Sons, Inc., Hoboken New Jersey, USA, 2006;

Van Greuning, Hennie: Standardele Internaionale de Raportare Financiar(ediie bilingv englez romn), Editura IRECSON, Bucureti, 2005.


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ACCOUNTING VALUATION

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