1. EBM 558Assets and Liability ValuationBy: Himosh Sharma

2. Introduction Valuation is the process of estimating whatsomething is worth. The valued items are usually financial assets orliabilities. Valuations can be done onAssets: Items the organization owns that can becashed upon. Could be tangible or intangible.Liabilities: The items with monitory value that areliable to be paid back. 3. Intangible AssetsIntangible assets are those assets which are notphysical in nature.An intangible asset can be classified depending onthe specifics of that asset as: Indefinite Definite 4. Indefinite and Definite IntangibleAssets Indefinite Intangible Asset:A company brand name is considered to be anindefinite asset, as it stays with the company aslong as the company continues operations. Definite Intangible Asset:If a company enters a legal agreement to operateunder another company's patent, with no plans ofextending the agreement, the company brandwould have a limited life and would be classifiedas a definite asset. 5. Common Intangible Assets Intellectual Properties . Goodwill of the company. Brand Recognition. 6. Purpose of Valuation Selling assets. To know the true position of the organization. Capital Budgeting Investment Analysis Proper Tax Liability For LitigationAnd so on. 7. Some Models For Valuation Absolute Value models Relative value models Option pricing models Fair value Model Appraised Value Model Book Value Model 8. Absolute Value Models This model determines the present value of anasset's expected future cash flows. (What they will be worth in the future) There are two forms:1. Multi-period models: Such as discounted cashflow models2. Single-period models such as the Gordon model. These models rely on mathematics rather thanprice observation. 9. Gordons Model This Model assumes that the dividends grow at aconstant rate at perpetuity and dividends are paidat the end of every year. This model might not seem that practical in reallife. The formula:P= _D__Reg 10. Discounted Cash Flow Discounted cash flow (DCF) is a method ofvaluing the intrinsic value of a company. It tries to work out the value today, based onprojections of all of the cash that it could makeavailable to investors in the future. It produces the closest thing to an intrinsic stockvalue.FCF= EBIT(1-tax rate)-(Capital Exp-Depreciation)-Change in Working Capital 11. Relative value Models This model is a simple model where the value ofthe assets are based on the observation ofmarket prices of similar assets. 12. Option Pricing Models This model is specifically used for a certain typeof financial assets like:WarrantsPut/Call OptionsEmployee Stock OptionsEmbedded Options (Like Callable Bonds) 13. Fair Value Model It is used in accordance with US GAAP Here, fair value is the amount at which the assetcould be bought or sold in a current transactionother than in a liquidation sale. This is used for assets carrying value- based onmark-to-market valuations. 14. Appraised Value Model Sometimes the assets exchanged dont have afair value determined. Then the value that has been determined by aprofessional appraiser is used. This model is often used for art, rare collectables,real estate, antiques and so on 15. Book Value Model The book value of a fixed asset is its recordedcost less accumulated depreciation. An old asset's book value is usually not a validindication of the new asset's fair market value. If a better basis is not available, a firm uses thebook value of old assets 16. What Is GAAP? GAAP stands for Generally Accepted AccountingPrinciple. GAAP is the common set of accountingprinciples, standards and procedures thatcompanies use to compile their financialstatements. GAAP are a combination of authoritativestandards (set by policy boards) and simply thecommonly accepted ways of recording andreporting accounting information. 17. Impacts of GAAP Ease on Financial Reporting:Basically, before the implementation of GAAP, thecompanies had to prepare different financialreport to comply with the standards of differentcountries to attract foreign investors. Corporate Management Benefits:There are MNCs who have processes in differentcountries which had to prepare financial reportsfor the countries it has been working on and onefor the home country. This would be expensiveand time consuming but after the introduction ofGAAP, it became much simpler. 18. Impacts of GAAP Impact on Investors:There are foreign investors willing to invest and seekingopportunities, due to the difficulty of understanding,which would drive them away. Due to the introductionof GAAP, the investors have now felt an ease onunderstanding the financial reports and able to takebetter financial decisions when investing on a foreignmarket. Impact on Stock Market:The stock market also benefits from GAAP as it allowsthe international competition on the trading of stocksfor the markets are following the same rules ofaccounting principles and will provide globalinvestment opportunities. 19. VALUATION- PRINCIPLES OFGAAP Historical Cost Principle Revenue Recognition Principle Matching Principle Full Disclosure Principle 20. Historical Cost Principle This Cost Principle requires companies toaccount and report based on acquisition costsrather than fair market value for most assets andliabilities. This principle provides information that is reliable(removing opportunity to provide potentiallybiased market values), but not very relevant. Therefor there is a trend to use fair values. 21. Revenue Recognition Principle This Principle holds that companies may notrecord revenue until:1. It is realized or realizable.2. When it is earned. The flow of cash does not have any bearing onthe recognition of revenue. This is the essenceof accrual basis accounting. Conversely, however, losses must be recognizedwhen their occurrence becomes probable,whether or not it has actually occurred. 22. Matching Principle Expenses have to be matched with revenues aslong as it is reasonable. Expenses are recognized not when the work isperformed and contributes to the revenue. If no connection with revenue can be established,cost may be charged as expenses to the currentperiod. Depreciation and COGS are good examples ofapplication of this principle 23. Full Disclosure Principle Information disclosed should be decided basedon trade-off analysis. Information disclosed should be enough to makea judgment while keeping costs reasonable. Information is presented in the main body offinancial statements, in the notes or assupplementary information. 24. FASB FASB stands for Financial Accounting StandardsBoard FASB is the designated organization in theprivate sector to establish standards that governthe preparation of financial reports.