The key issue, at the centre of the crisis of confidence that has driven the world’s financial slowdown, is clearly the present value of assets. Many of these assets are a mix of tangible and intangible component. For example, the value of a thirty year old business is its current and fixed assets plus its inventory less its liabilities, plus the intangible goodwill from customers that has accumulated over many years. Because of the goodwill and many other elusive values, which form significant parts of a balance sheet, an association of accounting and auditing professionals with worldwide recognition, set standards for valuating such assets.Standard Accounting Practices are a set of rules which were developed and are constantly reviewed to ensure that comparisons can be made and understood. Regulators, such as tax collectors and securities and exchange commissions, are guided by these rules. Noting that the same highly trained and experienced accounting professional that is charged to set and enforce the rules also serve clients, whose objectives are to make profits even if it means breaking the rules, hence, the complexity to hide an asset’s true value.
Book value is the transaction price less depreciation or amortization, equivalent to the present value of an asset. This works well for fixed assets (land, building, equipment, furniture and fixtures, etc.) but not so well for intangible or paper assets (contracts, license, formula, etc.). The rules are ambiguous when it comes to most paper assets, allowing for several values to be assigned to the same asset. For example, the chemical formula or recipe to a widely sold product can be calculated and booked at its transaction price plus an annual percentage (10-15%) of its product’s profit compounded added year-to-year. The interpretation is to the regulator, auditor or accountant.
Market value by a chartered valuator or independent rating agency is to set a “fair value” for a group of assets or shares of business, while the market price is set by how much one is willing to pay for the said assets. The rules allow market price to be recorded and booked if it is greater than market value, if not market value is used. The market value of paper assets are rated to show the risk associated with any type of default to what is expected. So if paper assets are booked at a high value but is rated “junk” the market value is zero. The chartered valuator or independent rating agency is the body answerable for the setting of market value.
Holding or parent companies were set up to reduce taxes by registering in tax-free jurisdiction and hiding or distorting the profitable companies and mixing them with business that may take a long time to become profitable. Derivatives and combinations of fixed and paper assets were used to attract the best financial ratings and to hide and distort worthless assets among good one. Who can be trusted to value assets?
Rationale
T.A.J & Associates Company Limited uses this occasion to comment on topics that have been covered, both academically and by the mainstream media, to add its opinion and point out investment opportunity, not to invoke any social action.
