Alternative approaches to measuring assets and the advantages and disadvantages
Evaluation method of assets is the technological measure for assessors to achieve the purpose of asset, which relates the high and low of results of the assessment in quality of assets (Catherine E. BaubyValery E. Just, 2003). In fact, the asset valuation method is not unique for property assessment, and it is the formation of methodology based on the accounting, auditing, engineering, technology and other disciplines, combined with its own set of characteristics. Asset evaluation method can be summarized as three basic methods of cost method, market method and income method (Lu Huaibao, Wang Xiuzuo, 2003). The comparative analysis of three kinds of evaluation methods is helpful to appraisers in the assessment process, according to the characteristics of the object, the purpose of assessment, evaluation and the objects of assessment in environment for the right choice of assessment methods.
A) Discuss with reference to the literature in the area the alternative approaches to measuring assets and the advantages and disadvantages of each approach.
The distinction between cost method, income method and market method
1, The difference of prerequisite for application
The use of cost method must meet the following conditions (Strategic Asset Management Guidelines, 2000): (1) should have historical data available. The application of cost method is built on the historical data, many information and indicators should be obtained through historical data. (2) to form the loss of value of assets is necessary, and should reflect the community or the industry average. (3) Cost method is mainly applied to the asset valuation under the continued use of assumption. (4) The assets to be assessed can be regenerated, and can be replicated, such as land, minerals, etc. can not be copied, can not be recycled in assets can not be cost method.
The application of Income method must be utilized: (1) the assets to be assessed in monetary terms can be used for its future expected return of individual assets or assets as a whole. If there is no expected return, or the expected return is less and also brings a little unstable, then can not use income method. (2) the risk of assets owners to obtain the expected benefits can be predicted and can be measured in monetary terms. (3) the expected profit terms of the assets to be assessed can be predicted.
The use of the market method needs to meet two basic prerequisites: (1) the need for a mature, fair and active asset markets to be able to fully from the market to choose the number of the same or similar frame of reference for comparison, analysis and pricing. (2) The frame of reference as well as the comparable indicators, technical parameters and other information of assets to be assessed can be collected.
2, The comparison of cost method and income method
The difference between cost method and income method lies in: the application of cost method is based on the historical data (Total Asset Management Manual, 2001). For example the determination of physical depreciation is based on the useful life and the use of strength of the assessment of objects; and functional depreciation is caused by the technical assessment of the object is relative backwardness and needs to compare the original features of the old assets and the functions, the new assets with the better performance to determine the depreciation. The income, compared with the cost method, should consider and focus on the object of assessment whether can bring the amount of gains for the controllers in the future. By the use of income method for asset valuation, it involves three main indicators: the amount of income, the discount rate and the return period. The amount of income refers to the use of assets brought about by future earnings expectations, rather than the history of assets, income amount or the amount of actual revenue. The discount rate is the expected rate of return in the case of a basic understanding of investment by the investors for investment risks. The return period is determined based on wear and tear of assets and future profitability. Therefore, the assessment indicator of income method is based on an analysis in the future.
3, The comparison of market method and cost method
(1) The difference of the degree of the constraints of market conditions. The application of market method great emphasis on the degree of marketization, and needs to be developed asset markets as the prerequisite, and the realization of the value of the assets subject to the constraints of market conditions; cost method is from the buyers point of reference to market prices, the constraints of market conditions on the cost method is relatively weak.
(2) The difference of basis of assets evaluation. Some of the calculations in cost method must be based on original cost and original data; the application of market method is not directly linked with the application of the original cost of assets.
(3) The difference of the contained contents of assets. Replacement cost includes not only the price of the asset itself (the acquisition or construction price), but also includes the installation and test cost of assets, transportation and other incidental expenses; the value of the assets estimated by market method is the independent price of assets.
(4) The difference of data acquisition and determination of indicators. Cost method is based on the current replacement cost of assets are assessed to deduct the losses have been assessed to determine the assessed value of the assets, so it simply has to make reference to a similar project; by the use of the market method for the value of the assets evaluation, the level of the assessed value of assets depends largely on the frame of reference transaction price levels, while the frame of reference transaction price is not just another point of reference reflect the market's own function, it also motivated by the buyers and sellers trading, transaction status, transaction duration, etc. of factors, in order to avoid a point of reference for individual transactions in the special factors to the contract price and the assessed value of the impact of the use of market law normally should choose three or more of the comparable point of reference.
4, The comparison of market method and income method
Market method needs from a mature, fair and active asset market to find a certain number of transaction instances, to collect information on points of reference assets, transactions and assets of examples of features, functional use, location, etc. of information, its evaluation principles simple, the evaluation process directly reflects the state of asset markets to assess the results easily recognized acceptable. The determination of any parameters in income method has the person's subjectivity, because the expected return, discount rate and return period are the unknown parameters, certain risk factors are also difficult to predict, but these parameters in assessing the value of assets must be clear, otherwise the income method can not be used. The way to determine the parameters is in the market to seek reference compound, and by selecting the reference point for further measures of its discount rate, discount rate and return period, and then compare them to the use of comparative data to assess the object, and then to determine the value of the assets.
B) With reference to specific examples, discuss how under IFRS assets and liabilities are measured in the Statement of Financial Position.
NETFLIX is founded by Reed Hastings in 1997, members online service is available since 1999, his initial idea is simply to provide online film rental service, but with the increase in Internet users as well as the DVD's popularity, NETFLIX develops with rapid growth, from 107 thousand members in 1999 increased to more than 5 million members, from the financial report of perspective, in 1999 the company achieved profit for 5 million U.S. dollars, later increases year by year, by 2005, NETFLIX Company’s profit was 41 million U.S. dollars; turnover rose by 36% to 688 million U.S. dollars. To 2006, the company's share price reached 1.38 billion U.S. dollars.
Since 2003, the Wharton Business School used this case to make to a number of tests, below is the disclosed data on customer behavior by NETFLIX Company in 2003.
Wharton Business School in their analysis, calculated that in 2003 the NETFLIX Company's customer lifetime value was approximately 100 U.S. dollars. You may not necessarily agree with their method of calculating the details, but you can find from simple reasoning, if there are underlying data, you can use (client balance sheet) to calculate the value of the company.
In the aspect of "client assets”, NETFLIX Company can be in accordance of the increase of historical customer data and an annual increase of the number of "free trial" customers to predict the number of new customers. Assume that they continue to be the largest proportion of joining the scheme of the 17.99 U.S. dollars / month for consumer-based, then you can figure out this part of the future assets; then multiply by the "old customer renewal rate” after the customer turnover rate, which is another part of the client assets;
In the aspect of "client liabilities", you can take into account the costs provided for free trial; plus the cost of care withdrew by the loss of customers to carry out, such as email and send coupons, etc.;
Then you can get a large movement of the "company value" when the "customer spending behavior" does not occur. When the competition begins, for example the introduction of new similar websites or customer is more likely to download videos directly from the network, then the above data will generate "transaction", and the company's value will change accordingly.
Perhaps you would like to say, not all businesses can be successful in establishing "customer spending habits" and allow such behavior remained stable, but perhaps more should ask, why have some companies can not do this?
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