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2
1. Check if a company has public bonds. If yes - use their YTM. If no, the next step should be taken.
2. Find bonds of companies' with a similar credit rating (use Damodaran's database) and a similar maturity, currency and other terms. Use their YTM. If terms are different - take the next step.
3. Find bonds with different terms and adjust them. Ways to adjust different terms are described in the main body of the article.
4. Apply the rate obtained for future flows discounting.
Reference
1. IAS 39. Financial Instruments: Recognition and Measurement.
2. Aswath Damodaran, Investment Valuation. 3rd Edition/ Wiley, 2012 - 992p.
3. Shannon P. Pratt, Valuing a business, 5th edition: The Analysis and Appraisal of Closely Held Companies/ McGraw-Hill, 2008 - 1152p.
УДК 657.22
Rozina A.A.
master's degree student of the faculty 'Accounting and Audit' Financial University under the Government of the Russian Federation
(Finuniversity), Financial University
Moscow, Russia Research supervisor: Polenova S.N.
Doctor of Economics, docent, Department of «Accounting.» Financial University under the Government of the Russian Federation
(Finuniversity), Financial University,
Moscow, Russia
METHODS OF VALUATION OF ACCOUNTING OBJECTS
Abstract: This article deals with the most significant methods of valuation in financial accounting. Different authors' views on types of measurement and their classification are analyzed.
Keywords: valuation, measurement, historical cost, current cost, realizable value, present value, fair value.
Valuation occupies a crucial place in financial accounting methodology. It is involved in all stages of production process and its fairness and accuracy can greatly influence the reliability of the financial result. There are many various ways of measuring the value of accounting objects. It is also important to notice that there is no fixed common list of these types of measurement in both international financial accounting standards (IFRS) and Russian accounting standards (RAS). What is more, different authors' opinions on types of measurement and their classification vary significantly. Table 1 represents types of measurement offered by different authors and accounting standards.
Authors Types of Measurement
Hendriksen E.S., van Breda M.F. Historical cost, current cost, appraisal value, fair value, net realizable value, discounted value, current cash equivalent, liquidation value.
Kovalev V.V., Kovalev Vit.V. Historical cost, replacement cost, residual value, current cost, market value, fair value, discounted value, contract price, replacement cost.
Sokolov J.V. Historical cost, constant (comparable) cost, replacement cost, realizable value, capitalized (rental) value, appraisal value, nominal value.
Babaev J.A. Historical cost, current cost, replacement cost, residual value, market value, realizable value.
IFRS Historical cost, current cost, Realizable (settlement) value, present value, fair value, residual value, recoverable amount, depreciable amount.
RAS Historical cost, current (replacement) cost, residual value, discounted value, contract price, current (market) value.
The Conceptual Framework for Financial Reporting acknowledges only four so called 'bases of measurement': historical (initial) cost, current cost, realisable (settlement) value and present (discounted) value. In fact the range valuation methods, offered by IFRS is much wider than this (other methods are mentioned in the Standards (IFRS and IAS) themselves). RAS do not contain any list of types of measurement at all, the requirements and definitions of them are given in specific Standards (RAS) as well. All the authors presented in Table 1 mention initial (historical) cost in their works. Many of them also mention replacement cost, discounted value, market value and realizable value. Moreover, Sokolov J.V. and Henrdiksen E.S. and van Breda M.F. mention appraisal value which is an estimated value obtained with the help of certain systematic procedures. Hendriksen E.S. and van Breda M.F. add that these procedures should be performed by third parties not directly connected with the company, which makes this type of measurement more objective. Among its drawbacks authors point out the impossibility to perform them often enough, consequently these estimates become obsolete and lose relevance [2, p. 314].
Among other types of measurement, some authors mention nominal cost. It is used when a company just needs to register some objects without determining their value (e.g. if the value of these objects is negligible or it cannot be reliably measured). It is also called 'pro memoria' value [5, p. 137; 8, p. 202-203].
Authors also name the contract price, which is determined by the terms and conditions of a contract. Finally, Herdriksen E.S. and van Breda M.F. consider the method of measurement, which they call 'current cash equivalent'. It is the amount of cash (purchasing power) that could be obtained by selling assets under conditions of orderly liquidation, which may be measured by market prices for similar goods [2, p. 316-317].
With the focus on IFRS, a range of the most significant measurement methods will be discussed below.
Initial (historical) cost is the most widespread type of measurement. It prevailed throughout the history of financial accounting and became one of the fundamental concepts of most European accounting schools. The situation did not change significantly until the 20th century, when the fair value category became widely used.
Initial cost is used in the process of recognition of accounting objects. In IFRS the historical cost of assets is defined as the amount of cash or cash equivalents paid to acquire these assets. The historical cost of liabilities is determined similarly, but the amount of cash or cash equivalents, which is necessary to settle the obligation is, used [4, p. 24]. Property, plant and equipment, intangible assets and inventories are usually recognized at their initial cost. Their cost can be determined in different ways that depend on the means by which these assets can be obtained (e.g. self-constructed, bought, received as a gift and so on). The IFRS definition of historical cost of assets and the definition, given by Hendricksen E.S. and van Breda M.F. are equal. But what is more, the authors emphasize that a company can not only purchase assets, but also get them in exchange for other assets [2, p. 309]. Sokolov J.V. points out the necessity to determine the historical cost in prices at the moment of acquisition [8, p. 201-202]. Karzaeva N.N. expresses the opinion that whatever way the initial cost is determined; it reflects the incurred or potential costs at the recognition date. Moreover, this method of valuation is the general term for such types of measurement as purchase price and production cost [3, p. 12-14]. Among the advantages of historical cost it is necessary to mention its simplicity of use and verification. It represents the value of a deal, which can always be confirmed with the help of accounting documents (acts, invoices, etc.). However, company's assets' value can change and over time their historical cost is no longer relevant and doesn't reflect its current market value correctly. And even if the prices remain constant, physical wear and commercial obsolescence take place [2, p. 310]. Thus, the term 'initial (historical) cost' causes many discussions among scholars and practitioners of accounting. On the one hand, accountants tend to record historical information, which is easy to check. On the other hand, to make economic decisions users of financial statements need current information about the company's financial position. This contradiction is one of the reasons for further search for alternative approaches in valuation.
One of the other methods of valuation is current (replacement) cost. The current cost of assets in IFRS is defined as the amount of cash or cash equivalents to be paid for the same or an equivalent asset at the current moment. To record the current cost of liabilities the amount of cash or cash equivalents required to satisfy the liability needs to be determined [4, p. 24]. Sokolov J.V.
connects this type of measurement with the reproduction of the potential, created in the past, in present or future [8, p. 202].
Babaev J.A. sees two possible forms of this reproduction: with the use of the reproduction cost of existing objects or equivalent objects, provided that the technical progress is taken into account [1, p. 169]. Scholars also signify that the price for the current value should be determined on the markets where a company acquires its assets, not sells those [2, p. 313]. Replacement cost is used in Russian financial accounting, e.g. for revaluation of assets. It is important that replacement cost and the fair value, at which assets are revalued according to IAS 16 'Property, Plant and Equipment' are not necessarily equal due to the differences in approaches to these values (e.g. calculation methods, sources of information). Some authors criticize current cost because of its subjectivity. For instance, it cannot be used to measure objects under the influence of fashion and seasonality or objects created in accordance with obsolete technologies [2, p. 310].
Initial (historical) cost or replacement cost of some accounting objects (e.g. property, plant and equipment, intangible assets) must be depreciated, i.e. systematically allocated over the useful life. Thus, the cost that should be allocated is called 'depreciable amount'. It is the initial cost or revalued amount (in RAS it is the replacement cost, in IFRS the fair value is used). What is more, the type of measurement, which is connected with initial cost and depreciable amount, is residual value.
There are conflicting definitions of residual value in literature as well as in accounting standards. In RAS this value can be obtained by subtracting the depreciation charge from the depreciable amount. Russian authors share this view [1, p. 169]. From this point of view residual value is derived from depreciable amount. However, in IFRS residual value is defined in a completely different way. In some sources it is called 'liquidation value' [6, p. 150]. Depreciable amount can be the same as initial (replacement) cost. But according to the IFRS depreciable amount is initial cost or its substitute less residual value, which is the amount that a company could receive at the current moment for an asset, if it were in the condition expected at the end of its useful life. This value is rather hard to measure reliably, because it should be determined at the moment of recognition of an object, while the end of its useful life will come much later.
A broader interpretation of liquidation value is given by Hendriksen E.S. and van Breda M.F. Authors characterize this concept from the point of a firm forcibly selling its assets at lower prices, which involves recognition of losses. It is not applied in the course of the ordinary activities of a company, however, it is rather useful when assets are obsolete and lose their utility or in case when a company is considering to stop functioning [2, p. 317].
It is also required by the IFRS to use recoverable amount in some situations, especially in case of impairment testing of assets. It is determined as
the higher of its fair value less costs of disposal and its value in use. The carrying amount of an asset should not exceed its recoverable amount; otherwise an impairment loss should be recognized.
One of the other widely used methods of valuation is realizable (settlement) value. According to IFRS, realizable value of an asset is measured as the amount of cash or cash equivalents that a company could get if it sold that asset at the current moment. Settlement value of a liability is defined as the not discounted amount of cash or cash equivalents required to satisfy it at the current moment. Selling of assets and settlement of liabilities must be performed in the normal course of business [4, p. 24]. The good example of the implementation of this method of valuation is measurement of inventories. They are measured at the lower of their cost and net realizable value, which is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs of sale.
Definitions of realizable value vary in different authors' works. In some sources it is interpreted as the revenue from the sale of property in any conditions in which a company is functioning, and it unifies such terms as liquidation value, retail price, wholesale price and other values of such kind [8, p. 202]. Babaev J.A. attributes realizable value solely to the activities of trade and catering organizations. He also adds contract price, free (market) price, premium and discount prices to his list of realizable values [1, p. 172].
The next type of measurement is very popular in international accounting practices, but it is rarely used in Russia. It is present (discounted) value. In IFRS it is defined as the discounted value of the expected future net cash inflows. For liabilities it is the same, but the value of net cash outflows is needed [4, p. 24]. The economic sense of discounting lies in determining the future value of cash at the current moment. It is performed with the help of the compound interest method. Present value is useful when a company acquires some assets on deferred payment conditions. It is also used when assessing the financial consequences of alternative economic decisions. For example, in this way a company can find out which of the decisions is more beneficial: to buy a building or to rent it [2, p. 315]. Authors admit that accountants can face some difficulties while calculating present (discounted) value of accounting objects. For instance, while discounting the future cash flows to the present time the most questionable point is the choice and justification of an interest rate, because in the end it greatly influences the calculated value [6, p. 154].
A category, that should be considered separately, is the fair value category. The new stage of the evolution of both financial accounting and valuation as an element of its methodology is connected to its growing popularity. The IFRS 13 'Fair Value Measurement' contains its most comprehensive definition. Fair value is 'the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market
conditions (i.e. an exit price) regardless of whether that price is directly observable or estimated using another valuation technique' [7, p. 3]. According to IFRS, financial instruments, intangible assets (when exchanging this type of assets or recognising and measuring the identifiable assets and liabilities for business combinations) are measured at their fair value. The aim of the fair value measurement (as a current cost of an accounting object) is to find the most adequate and objective value in current market conditions.
References
1. Babaev J.A. Accounting Theory: a textbook, 4th ed., revised and updated. M.: UNITY-DANA, 2015. - 303 p.
2. Hendriksen E.S., van Breda M.F. Accounting Theory: transl. from English / edited by prof. Sokolov J.V. M.: Finance and statistics, 2000. - 576 p.
3. Karzaeva N.N. The Problem of accounting objects measurement: a monograph. Saint Petersburg: the Saint Petersburg State University of Economic and Finance Publishing House, 2005 - 215 p.
4. Conceptual Framework for Financial Reporting // URL: http://www.minfin.ru/common/upload/library/2014/06/main/kontseptualnye osn ovy_na_sayt_bez_predisloviya_-_kopiya.pdf (accessed: 10.01.2016) (in Russ.)
5. Kovalev V.V., Kovalev Vit.V. Financial Statements. Financial Statements Analysis (the Basics of Balance Sheet Studies): a textbook, 2nd ed., revised and updated. M.: TK Velbi, Prospect Publishing House, 2006. - 432 p.
6. Kuter M.I. Accounting Theory: a textbook, 3rd ed., revised and updated. M.: Finance and statistics, 2007. - 592 p.
7. International Financial Reporting Standard (IFRS) 13 'Fair Value Measurement': enacted for use on the territory of Russian Federation by the Order of the Ministry of Finance of Russian Federation of 18.07.2012 №106n URL: http://minfin.ru/common/upload/library/2015/10/main /prilozhenie_N_7_-_RU_GVT_IFRS_13_May_2011.docx (accessed: 10.01. 2016)
8. Sokolov J.V. The Basics of Accounting Theory. M.: Finance and statistics, 2003. - 496 p.
УДК 338.488.2
Абдокова Л. З., кандидат экономических наук доцент кафедры «Менеджмент и маркетинг» ФГБОУ ВПО «Северо-Кавказская государственная гуманитарно-технологическая академия»
Россия, г. Черкесск ИНДУСТРИЯ ГОСТЕПРИИМСТВА КАК ПРИОРИТЕТНАЯ
ОТРАСЛЬ РАЗВИТИЯ ЭКОНОМИКИ РЕГИОНА Статья посвящена развитию одного из наиболее актуальных секторов мировой экономики - сфере туризма, в частности развитию индустрии гостеприимства на региональном уровне и ее влиянию на экономику региона в целом.
