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             University Lecturer
             MARIAN COVLEA
             PhD Candidate in
           Financial Management
                May 14, 2007
             Kind Requests!

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            Thank you in advance!
               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:

     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:
1.   reflects the objective, hard, visible, tangible,
     concrete, verifiable part of an asset, a liability, a
     business or a company.
2.   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:
1.   represents the extension of user’s want/need
     fulfillment and satisfaction, it is highly
2.   reflects the subjective, soft, invisible, hardly
     verifiable or provable part of an asset, a liability,
     a business or a company.
3.   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

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 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

    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 compulsion.
      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:
a.   Weighted Average Cost
b.   FIFO: First In – First Out
c.   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:
1. Normal levels of materials, labour and actual
   capacity should be taken into account
2. 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)

   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.
         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:
1. Risk-free long-term government bond rate
2. Long-term equity risk premium
3. Small company risk premium (where applicable)
4. Specific company risk premium
5. 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:
1.   Manufacturer’s price
2.   Whole sale price
3.   Retail price
4.   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
                  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: Dicţionar internaţional de finanţe,
    Editura Universal Dalsi – 2000, Bucureşti, 2000;
   Boardman, Anthony E.; Greenberg, David H.; Vining, Aidan R.; Weimer,
    David L.: Analiza Cost – Beneficiu: Concepte şi practică, Editura ARC,
    Chişinău, Republica Moldova, 2004;
   Caplan, Suzanne: Finance & Accounting, Adams Media Publishing House,
    Avon – Massachussetts, USA, 2000;
   Călin, Oprea; Ristea, Mihai: Bazele contabilităţii, Editura Naţional, Bucureşti,
   Collin, P.H.; Jollife, Adrian: Dicţionar de contabilitate englez – român, Editura
    Universal Dalsi – 2000, Bucureşti, 2000;
                 BIBLIOGRAPHY (2)

   International Accounting Standards Board: International Accounting
    Standards/International Financial Reporting Standards, London – UK, 2007,;
   International Valuation Standards Committee: International Valuation
    Standards, Eighth Edition, London – UK, 2007,;
   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 bază ale contabilităţii (ediţia a cincea), Editura ARC, Chişinău, Republica
    Moldova, 2001;
   Random House Webster’s College Dictionary, New York - NY, USA, 2003;
   Siegel, Joel G.; Shim, Jae K.: Dictionary of Accounting Terms, Barron’s
    Business Guides, Hauppauge – New York, USA, 2005;
                BIBLIOGRAPHY (3)

   Smith Linton, Heather: Business Valuation, Adams Media Publishing House,
    Avon – Massachussetts, USA, 2004;
   Traşcă, Margareta: Evaluări contabile patrimoniale, Editura Tribuna
    Economică, Bucureşti, 1998;
   Ulrich, Dave; Smallwood, Norm: How Leaders Build Value, John Wiley &
    Sons, Inc., Hoboken – New Jersey, USA, 2006;
   Van Greuning, Hennie: Standardele Internaţionale de Raportare Financiară
    (ediţie bilingvă engleză – română), Editura IRECSON, Bucureşti, 2005.
        THE END

  From the bottom of my heart:


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