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It will not be easy, so please pay your
full attention to the presentation! Please turn your cell phones on Silent
orMute mode
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Thank you in advance!
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Kind Advice!
1. 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?cid=1064
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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 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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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 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
Accounting Valuation
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:
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 determinavaloarea economica, monetara, etc.Apparaisal = evaluare in economieAppraiser = 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 impozitareAssessment = estimare oficiala
Assessor = persoana care face evaluari deproprietati 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 (oproprietate)
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 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.
Synonyms for Valuation (8)
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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 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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ACCOUNTING VALUATION
Norms, Regulations and Good Practice (2):
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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ACCOUNTING VALUATION
Norms, Regulations and Good Practice (3):
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=10648/14/2019 ACCOUNTING VALUATION
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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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Bases for Accounting Valuation
- 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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Bases for Accounting Valuation
- 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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Bases for Accounting Valuation
- 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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Bases for Accounting Valuation
- 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
of Inventories as Output (2)
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
of Inventories as Output (3)
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
of Inventories as Output (4)
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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Valuation of Goodwill (2)
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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Valuation of Goodwill (3)
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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Other Methods of Valuation (2)
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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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 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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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 (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/8/14/2019 ACCOUNTING VALUATION
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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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THE END
From the bottom of my heart:
THANK YOU
FOR YOUR KIND ATTENTION!