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University Lecturer
PhD Candidate in
Financial Management
May 14, 2007
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these slides are available for free at:

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

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.

Valuation is a technique of the

Financial Accounting Method

Accounting Valuation
is preceeded by:
(Business) Analysis and Diagnosis
of the element to be valued
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
 Estimated or assigned worth
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, a
business or a company.
4. inspires and generates patrimonial valuation
methods, based on costs of incorporated
factors (labour, energy, materials and
information) in the element to be valued.
What is Value? (3)
Value in Accounting

 Utility Value:
 represents the extension of user’s want/need
fulfillment and satisfaction, it is highly
 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.
What is Value? (4)

The Market Value (as a form of Fair Value)

reconciles the two types of value

Value and Valuation
are core subjects and major concerns in
What is “Valuable”?

 Having considerable monetary worth

 Of considerable use or importance

 Having qualities worthy of esteem

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
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,
 Equity (owners’ shares or capital)
 Income (revenue, gains/profits/benefits)
What do we valuate? (2)

 Expenses, costs
 Securities (stocks/shares, bonds,
derivatives - options, futures)
 Businesses
 Companies
 Activities
 Advertising campaigns, etc.
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.
and Accounting Policies (1)

Accounting policies are the specific

principles, bases, conventions, rules and
practices adopted by an entreprise in
preparing and presenting financial
Accounting policies should be chosen in
order to comply with IASs and IFRSs.
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.
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

(“Evaluare economico-financiara”)
Accounting Valuation

 To valuate = a evalua dpdv economic si contabil

 Valuation (process) = (procesul de) evaluare
 Valuer = evaluator
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”

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”

Synonyms for “Valuation” (3)

 To estimate = a estima, a aproxima,

a evalua global
 Estimation = estimare, aproximare
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
Synonyms for “Valuation” (5)

 To approximate = a aproxima

 Approximation = aproximare
Synonyms for “Valuation” (6)

 To survey = a analiza in amanunt, a

inspecta, a expertiza, a evalua (o
 Surveyor = inspector – evaluator:

“The Royal Institution of Chartered

Synonyms for “Valuation” (7)

 To valorize = to maintain the value or the price

(of a commodity), especially by subsidies or the
government’s purchase at a fixed price.
 Valo(u)r = boldness or determination in facing
danger; worth.
 Valorous = to be worth.
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.
Synonyms for Valuation (8)

 Pricing is one of the four p’s 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.

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

Norms, Regulations and Good Practice (2):

 International Valuation Standards (IVS), including
Guidelines, issued by International Valuation
 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

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:
as “Metodele rapide de evaluare”
 OMFP nr. 1.752/2005 (Monitorul Oficial nr. 1.080 /
30.11.2005), completed and updated
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
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
 Net realizable (settlement) value: sale price
less sale expenses
 Present (market) value, a variety of Fair Value
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
 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
4. Replacement costs, or costs of close substitutes
5. Production/distribution costs, including a cost of capital
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.
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 arm’s-length
transaction after proper marketing wherein
the parties had each acted
knowledgeably, prudently, and without
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.
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
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
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
 The cost of other inventories is assigned by
using either of the following cost formulas:
c. Weighted Average Cost
d. FIFO: First In – First Out
e. LIFO: Last In – First Out
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:

3. Normal levels of materials, labour and actual

capacity should be taken into account
4. The standard cost should be reviewed regularly
in order to ensure that it properly approximates
actual costs.
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
of Inventories as Output (4)

 NetRealisation 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.
Valuation of Goodwill (1)

 Post-factum = Net Acquisition Value (book

value, recognised by the market = Market Value):
Aquisition Price of Company
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
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
Valuation of Goodwill (3)

k = Discount Rate, which includes:

2. Risk-free long-term government bond rate
3. Long-term equity risk premium
4. Small company risk premium (where applicable)
5. Specific company risk premium
6. An additional risk premium based on the
appraiser’s judgement of specific company risks
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
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.
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
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.
Other Methods of Valuation (3)

4 applications of The Rule of Thumb

 Fast food franchise = 50% of annual sales
 Heating, ventilation & air conditioning contractors
= 2 times annual cash profits
 Mail order business = 50% of annual sales +
 M o t e l = $20,000 times number of rooms.
in Accounting Valuation

 Input/Entry into Patrimony (investments as

owner’s equity, purchase, conversion/production,
 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.)
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. Manufacturer’s price
5. Whole sale price
6. Retail price
7. Export/Import price
 A previous price is a cost for the next link.

You may ask any question!

Do not be shy!

Thank You,
for Your Kind and Understanding
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(ediţie bilingvă engleză – română), Editura IRECSON, Bucureşti, 2005.

From the bottom of my heart: