ACCOUNTING VALUATION

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ACCOUNTING VALUATION

• University Lecturer
• MARIAN COVLEA
• PhD Candidate in
• Financial Management
• May 14, 2007

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Kind Requests!

• It will not be easy, so please pay your full
  attention to the presentation!
• Please turn your cell phones on Silent or Mute
  mode
• You can ask anything, anytime!
• Thank you in advance!

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Kind Advice!

• You can divide your sheets of note-paper
• into two vertical halves (columns)
• The left column for slide contents
• The right column for additional comments,
  explanations, examples, synonyms, etc.
• 2. Be attentive rather than writing
  word-by-word, these slides are available for free
  at http//www.ucdc.info/cd/cd_profil.php?cid1064
  

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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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WHAT IS VALUATION? (2)

• Valuation is the process of estimating the market
  value of a financial asset or liability.
  Valuations can be done on assets (for example,
  investments in marketable securities such as
  stocks, options, business enterprises, or
  intangible assets such as patents, trademarks,
  know-how, software, databases, and goodwill) or
  on liabilities (e.g., bonds issued by a company).
  Valuations are required in many contexts
  including investment analysis, capital budgeting,
  merger and acquisition transactions, financial
  reporting, taxable events to determine the proper
  tax liability, and in litigation.

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WHAT IS VALUATION? (3)

• 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 importance
• Monetary or material worth, as in commerce
• The worth of something in terms of some medium of
  exchange
• Equivalent worth in money, material or service
• Estimated or assigned worth

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What is Value? (2)Value in Accounting

• Value is a complex notion, including
• Intrinsic Value
• reflects the objective, hard, visible, tangible,
  concrete, verifiable part of an asset, a
  liability, a business or a company.
• inspires and generates patrimonial valuation
  methods, based on costs of incorporated factors
  (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/need
  fulfillment and satisfaction, it is highly
  subjective.
• 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 in
  Accounting

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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
• Companies
• Activities
• Advertising campaigns, etc.

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The Necessity of Accounting Valuation

• According to IAS/IFRS Framework, a financial
  statement element (assets, liabilities, equity,
  income, expenses) should be recognized in the
  financial statements only if
• It is probable that any future economic benefit
  associated with the item will flow to or from the
  entity and
• The item has a cost or value that can be measured
  with reliability.

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Valuation and Accounting Policies (1)

• Accounting policies are the specific principles,
  bases, conventions, rules and practices adopted
  by an entreprise in preparing 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 transactions and
  not merely their legal form, and offer a True
  and Fair View on patrimony, financial results
  and financial position of the company.

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Valuation and Accounting Principles (Conventions)

• Prudence for reasons of prudence, between book
  value and present value, the least of the two
  will be selected
• Adequacy valuation methods should be adequate to
  (consistent with) the nature of the valuated
  element

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BUSINESS VALUATION

• BUSINESS VALUATION (Evaluare economico-financiar
  a) includes
• Accounting Valuation
• 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 determina valoarea
  economica, monetara, etc.
• Apparaisal evaluare in economie
• Appraiser pretuitor, evaluator
• American Society of Appraisers

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Synonyms for Valuation (2)

• To assess a aprecia, a estima oficial valoarea
  unei proprietati in scop de impozitare
• Assessment estimare oficiala
• Assessor persoana care face evaluari de
  proprietati in scop de impozitare
• Scottish Assessors Association

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Synonyms for Valuation (3)

• To estimate a estima, a aproxima,
• a evalua global
• Estimation estimare, aproximare

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Synonyms for Valuation (4)

• 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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Synonyms for Valuation (5)

• To approximate a aproxima
• Approximation aproximare

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Synonyms for Valuation (6)

• To survey a analiza in amanunt, a inspecta, a
  expertiza, a evalua (o proprietate)
• Surveyor inspector evaluator
• The Royal Institution of Chartered Surveyors

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Synonyms for Valuation (7)

• To valorize to maintain the value or the price
  (of a commodity), especially by subsidies or the
  governments purchase at a fixed price.
• Valo(u)r boldness or determination in facing
  danger worth.
• Valorous to be worth.

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Synonyms for Valuation (8)

• 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 of multiple
  orders or lines, and many others. Automated
  systems require more setup and maintenance but
  may prevent pricing errors.

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Synonyms for Valuation (8)

• 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 variable in
  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), issued
  by International Accounting Standards Committee
  (IASC) until April 2001
• International Financial Reporting Standards
  (IFRS), issued by International Accounting
  Standards Board (IASB) after April 2001

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ACCOUNTING VALUATION

• Norms, Regulations and Good Practice (2)
• International Valuation Standards (IVS),
  including Guidelines, issued by International
  Valuation Committee
• Best Practices (including Professional Ethics and
  Deontology) created and developed by big
  international consultancy companies (Big Four,
  etc.) and promoted by professional bodies as
  Guidelines and Codes

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ACCOUNTING VALUATION

• Norms, Regulations and Good Practice (3)
• Tradition (Rules of Thumb), especially in Great
  Britain, United States, Germany and France
• On this subject, an article is posted and can
  be downloaded for free from
• http//www.ucdc.info/cd/cd_profil.php?cid1064
  
• as Metodele rapide de evaluare
• OMFP nr. 1.752/2005 (Monitorul Oficial nr. 1.080
  / 30.11.2005), completed and updated

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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 technical norms
  for valuation and promote good practices, ethics
  and deontology

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Bases for Accounting Valuation - Types of Value
(1)

• Historical cost or book value purchase or
  production cost plus other expenses (freight,
  installation, provision, non-deductible taxes)
• Current (present, actual) cost updated, nowadays
  historical cost less depreciation or amortization
• Net realizable (settlement) value sale price
  less sale expenses
• Present (market) value, a variety of Fair Value

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Bases for Accounting Valuation - Types of Value
(2) Fair Value

• Whenever possible, financial statement elements
  should be valuated at a Fair Value. Market Value
  is the most desirable variety of Fair Value
• Fair value, also called fair price, is a concept
  used in finance and economics, defined as a
  rational and unbiased 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 value based on personal needs)
• 3. Potential risk/return characteristics (i.e.,
  for a tradable asset)
• 4. Replacement costs, or costs of close
  substitutes
• 5. Production/distribution costs, including a
  cost of capital

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Bases for Accounting Valuation - Types of Value
(3) Active Market

• Market Value is the most desirable variety of
  Fair Value.
• Market Value is accepted only if all Active
  Market conditions exist
• The items traded in the market are homogeneous
• Willing buyers and sellers can normally be found
  at any time and
• Prices are available to the public.

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Bases for Accounting Valuation - Types of Value
(4) Market Value

• Market value is the estimated amount for which a
  property should exchange on the date of valuation
  between a willing buyer and a willing seller in
  an arms-length transaction after proper
  marketing wherein the parties had each acted
  knowledgeably, prudently, and without compulsion.

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Bases for Accounting Valuation - Types of Value
(5) Value Added

• Value added difference, at each stage of
  production and trade, between the price of final
  product and the cost of all factors purchased to
  make the product. Value added 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 and production
  overheads including variable overheads and fixed
  overheads allocated at normal 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 necessary prior 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 ordinarily
  interchangeable and those produced and segregated
  for specific projects are assigned by specific
  identification of their individual costs
• The cost of other inventories is assigned by
  using either of the following cost formulas
• Weighted Average Cost
• FIFO First In First Out
• LIFO Last In First Out

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Value/Cost of Inventories as Output (2)

• The following techniques can be used to measure
  the cost of inventories if the results better
  approximate cost
• Standard Cost
• Normal levels of materials, labour and actual
  capacity should be taken into account
• The standard cost should be reviewed regularly in
  order to ensure that it properly approximates
  actual costs.

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Value/Cost of Inventories as Output (3)

• Retail Method
• 1. Sales value should be reduced by gross margin
  to calculate cost.
• 2. Average percentage should be used for each
  homogeneous group of items.
• 3. Marked-down prices should be taken into
  consideration.

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Value/Cost of Inventories as Output (4)

• Net Realisation Value (NRV) is the estimated sale
  price less the estimated cost of completion and
  costs necessary to make the sale. These estimates
  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 (book value,
  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 sale of
  the business or forecasting purposes, not for
  bookkeeping.

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Valuation of Goodwill (2)

• Discounted Cash Flow (DCF) Method is derived from
  the future value formula for calculating the time
  value of money and compounding returns, or the
  capacity of a business to create over-profit
• FV PV (1 k)n
• FV Future Value, after n years
• PV Present Value
• n number of years of period considered

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Valuation of Goodwill (3)

• k Discount Rate, which includes
• Risk-free long-term government bond rate
• Long-term equity risk premium
• Small company risk premium (where applicable)
• Specific company risk premium
• 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 represents the value of a company as a
  whole, calculated by accountants.
• Market Value (at the Stock Exchange, for listed
  companies).

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Value and Price

• Value is an opinion of an expert and merely an
  interval, 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,
  stipulated in an offer or in a contract as a
  result of bids / auctions, negotiations,
  commodity exchange transactions, etc.

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Other Methods of Valuation (1)

• Liquidation Value The estimated amount of money
  that an asset or company could quickly be sold
  for, such as if it were to go out of business. If
  the liquidation value per share for a company is
  less than the current share price, then it
  usually means that the company should go out of
  business (or that the market is misvaluing the
  stock), although this is uncommon.

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Other Methods of Valuation (2)

• Rule of Thumb A rule of thumb is a principle
  with broad application that is not intended to be
  strictly accurate or reliable for every
  situation. It is an easily learned and easily
  applied procedure for approximately calculating
  or recalling some value, or for making some
  determination. It comes from tradition,
  experience and local market conditions.

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Other Methods of Valuation (3)

• 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 as
  owners 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
• Manufacturers price
• Whole sale price
• Retail price
• Export/Import price
• A previous price is a cost for the next link.

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ACCOUNTING VALUATION

• You may ask any question!
• Do not be shy!

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ACCOUNTING VALUATION

• Thank You,
• for Your Kind and Understanding
• Attention!

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BIBLIOGRAPHY (1)

• ACCA (The Association of Chartered Certified
  Accountants) Preparing Financial Statements
  International Stream (Paper 1.1), BPP Publishing,
  London UK, 2001
• Bannock, Graham Manser, William Dictionar
  international de finante, Editura Universal Dalsi
  2000, Bucuresti, 2000
• Boardman, Anthony E. Greenberg, David H.
  Vining, Aidan R. Weimer, David L. Analiza Cost
  Beneficiu Concepte si practica, Editura ARC,
  Chisinau, Republica Moldova, 2004
• Caplan, Suzanne Finance Accounting, Adams
  Media Publishing House, Avon Massachussetts,
  USA, 2000
• Calin, Oprea Ristea, Mihai Bazele
  contabilitatii, Editura National, Bucuresti,
  2001
• Collin, P.H. Jollife, Adrian Dictionar de
  contabilitate englez român, Editura Universal
  Dalsi 2000, Bucuresti, 2000

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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 Valuation Standards, Eighth
  Edition, London UK, 2007, www.ivsc.org
• Low, Jonathan Cohen Kalafut, Pam Invisible
  Advantage How Intangibles Are Driving Business
  Performance, Cap Gemini Ernst Young, Cambridge
  Massachussetts, USA, 2002
• Needles Jr., Belverd E. Anderson, Henry R.
  Caldwell, James C. Principiile de baza ale
  contabilitatii (editia a cincea), Editura ARC,
  Chisinau, Republica Moldova, 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

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BIBLIOGRAPHY (3)

• Smith Linton, Heather Business Valuation, Adams
  Media Publishing House, Avon Massachussetts,
  USA, 2004
• Trasca, Margareta Evaluari contabile
  patrimoniale, Editura Tribuna Economica,
  Bucuresti, 1998
• Ulrich, Dave Smallwood, Norm How Leaders Build
  Value, John Wiley Sons, Inc., Hoboken New
  Jersey, USA, 2006
• Van Greuning, Hennie Standardele Internationale
  de Raportare Financiara (editie bilingva engleza
  româna), Editura IRECSON, Bucuresti, 2005.

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THE END

• From the bottom of my heart
• THANK YOU
• FOR YOUR KIND ATTENTION!
• marian.covlea_at_gmail.com
• mariancovlea_at_yahoo.co.uk