Methodological foundations and approaches to business valuation. Cost approach to business valuation: description, essence and examples

25.09.2019

In accordance with Russian and international standards When assessing the market value of various objects, and, in particular, an enterprise, it is recommended to use three main approaches, based on the scope of application of the assessment. These are cost, income and comparative approaches.

In general, all three approaches are interrelated. Each of them involves the use of its own specific methods and techniques, and also requires compliance with special conditions and the presence of sufficient factors. The information used in one approach or another reflects either the present position of the enterprise, or its past achievements, or expected future earnings.

Cost-based approach to business valuation

Cost-effective approach business valuation considers the value of the enterprise in terms of costs incurred. The book value of the assets and liabilities of an enterprise due to inflation, changes in market conditions, and accounting methods used, as a rule, does not correspond to market value.

As a result, the appraiser is faced with the task of adjusting the balance sheet of enterprises.

To do this, the reasonable market value of each balance sheet asset is first assessed separately, then it is determined how the balance sheet amount of liabilities corresponds to their market value, and finally, the current value of all its liabilities is subtracted from the basic frame value of the amount of assets.

The result shows the estimated cost equity enterprises.

Equity = asset - liability is basic formula property (cost) approach.

This approach is represented by two main methods:

Cost method net assets;

Liquidation value method.

In this work, the net asset method was used.

The sequence of work for calculating the value of equity capital using the net asset value method includes the following steps:

Calculation of the net asset value method includes the following steps:

1. Analysis is carried out balance sheet for the past period.

2. Accounting adjustments are made.

3. The real estate of the enterprise is assessed at a reasonable market value.

4. The reasonable market value of machinery and equipment is determined.

5. Intangible assets are identified and assessed.

6. The market value of financial investments is determined.

7. Inventories are converted to current value.

8. Accounts receivable are assessed.

9. Future expenses are estimated.

10. The enterprise's liabilities are translated into current value.

11. The value of equity capital is determined by subtracting the current value of all liabilities from the reasonable market value of the amount of assets.

Determination of market value real estate enterprises

To evaluate real estate (land, buildings and structures), it is possible to use three approaches: income, comparative (market) and cost.

Technology of application of the income approach. The income approach to real estate valuation includes two methods:

Income capitalization method;

Discounted cash flow method.

The income capitalization method is used to value real estate that generates relatively stable income. Income from owning real estate can come in the form of current and future income from renting it out, income from a possible increase in the value of real estate when it is sold in the future. The result of this method includes both the cost of the building, structures, and the cost of the land plot.

Discounted cash flow method. This method is used to determine the current value of future income that will be incurred by the use of the property and its possible sale.

Calculation using the discounted cash flow method can be divided into several stages:

A forecast is made of the flow of future income during the period of ownership of the property;

The value of the property being valued is calculated at the end of the ownership period, i.e. the cost of the proposed sale (reversion), even if in reality no sale is planned;

The discount rate for the valued property in the existing market is derived,

The future value of income during the holding period and the projected cost of reversion are reduced to the current value.

Thus, the value of real estate is equal to the present value of the periodic income stream and the present value of the reversion.

Technology of application of the comparative approach. This approach is based on the comparison and analysis of data on the sale of similar properties, usually over the last 3-6 months. The fundamental principle of the comparative approach is the principle of substitution, which states that if there are several properties on the market, a rational investor will not pay more for a given property than the cost of real estate of similar utility.

Technology of applying the cost approach. This approach includes several steps:

1. The value of the land plot on which the building or structure is located is determined;

2. The full replacement cost is estimated as of the actual valuation date.

Replacement cost means the cost of construction at current prices on the actual date of valuation of an object with a utility equal to the utility of the object being valued, but using new materials in accordance with current standards, design, layout. Thus, in one case it means the reproduction of an exact copy of the object of evaluation, and in the other - its replacement with a suitable substitute.

Estimation of the full cost of construction includes the calculation of:

Direct costs (cost of materials, depreciation deductions, wages construction workers, etc.);

Indirect costs (costs of paying for the professional services of architects, design engineers, accountants and lawyers for consulting services to pay for licenses, etc.);

Entrepreneurial income.

Entrepreneurial income is the amount that an investor expects to receive in excess of the costs of implementing the project, taking into account the risk and return of comparable objects. Taking into account global calculation practices, business income is determined at 15% of construction costs.

Construction cost + Business income = Total construction cost.

All types of wear and tear on buildings and structures are calculated, taking into account their physical, functional, technical and economic aging.

Physical aging is the loss of property value caused by wear and tear, deterioration, maintenance costs and other physical factors that detract from the life and usefulness of the property.

Functional obsolescence is the loss in value of a property due to its inability to perform the functions for which it was intended. Functional obsolescence is an internal property of the property and is associated with factors such as structural and other deficiencies inherent in the creation of the property, excess operating costs, etc.

Economic obsolescence is the loss in value of an asset caused by external factors, such as: economic changes, decreased demand for products, increased competition, etc.

The residual value of buildings and structures is determined as the difference between the cost of reproduction (cost of restoration or replacement cost) and total depreciation;

The full value of the property is calculated by adding the cost of the land plot to the residual value of the building and structures.

Assessment of the market value of machinery and equipment

The assessment of the market value of machinery and equipment is based on a cost, comparative and income approach.

Cost-based approach to the assessment of machinery and equipment.

Plant and equipment are usually valued at replacement cost.

Replacement cost is determined by analyzing retrospective costs, estimating the costs of replacing the corresponding capacities:

Physical obsolescence;

Functional obsolescence;

Technical obsolescence;

The comparative approach to the valuation of machinery and equipment involves analyzing the prices of recently sold similar objects to calculate the most likely selling price of the object being valued. The choice of appropriate units of comparison is important. The comparison is based on the following elements: age of the object (It is advisable to compare the object with the prices of assets of the same production period), condition, accessories (components), location, manufacturer, market conditions, motivation, quality, quantity (the price per unit of the asset is largely determined by the size of the lot machines bought and sold), size/type (for comparison it is advisable to use equipment of the same size and type), time of sale.

Income approach to the valuation of machinery and equipment. To implement the income approach, it is necessary to predict the expected income from the property being valued. In relation to machinery and equipment, it is impossible to directly solve this problem, since income is created by the entire production and property complex. When using the income approach, a step-by-step solution to the problem is proposed:

Calculation of net income from the operation of: a production system (either the entire enterprise, or a workshop or site);

The residual method determines that part of the income that can be attributed to the machine park of this system;

Using the discounting method or the capitalization method, the cost of the entire machine park is determined.

Valuation of intangible assets

According to paragraph 3 of PBU 14/2000, an intangible asset accepted for accounting must satisfy the following conditions:

There are documents that confirm the existence of the asset itself and the organization’s exclusive right to the results of intellectual activity (patents, certificates, other documents of protection, agreement of assignment (acquisition) of a patent, trademark).

Assessment of unfinished construction projects

The assessment of unfinished construction projects is carried out at actual costs, taking into account the index of changes in prices for construction and installation work as of the assessment date.

Assessment of the market value of financial investments.

The assessment of financial investments is carried out based on their market value as of the date of assessment and is the subject close attention. The value is determined on the market, but if the securities are not quoted, then you need to independently determine their market value.

Inventory valuation

Inventory inventories are valued at current prices, taking into account the costs of transportation and warehousing. Obsolete inventory is written off.

Valuation of deferred expenses - expenses are usually valued at face value if there is an associated benefit.

Accounts receivable valuation - usually assessed by analyzing the aging schedule, with the overdue amount being partially or fully written off after a certain period of time.

Grade Money. This item is not subject to revaluation in ruble terms.

Cost-effective approach general characteristics approach. Net asset value method. Liquidation value method.

Net Asset Value Method

The cost approach to business valuation considers the value of the enterprise in terms of the costs incurred. This approach is represented by two main methods: the net asset value method and the liquidation value method.

The net asset value estimate is obtained by valuing all of a company's assets minus all of its liabilities. Calculation of the net asset value method includes several stages:

1) the real estate of the enterprise is assessed at a reasonable market value;

2) the reasonable market value of machinery and equipment is determined;

3) intangible assets are identified and assessed;

4) the market value of financial investments is determined;

5) inventories are converted to current value;

6) accounts receivable are assessed;

7) expenses of future periods are estimated;

8) the enterprise’s liabilities are translated into current value;

9) the value of equity capital is determined by subtracting the current value of all liabilities from the reasonable market value of the amount of assets.

To evaluate real estate (land and buildings, structures), it is possible to use three approaches: profitable, comparative (market) and cost-based. Application of the cost approach includes the following stages: the cost of the land plot on which the buildings and structures are located is determined; the replacement cost or replacement cost of the building and structure is assessed as of the actual valuation date; all types of depreciation of buildings and structures are calculated taking into account their physical, functional, technological and economic obsolescence; the residual value of buildings and structures is determined as the difference between the cost of reproduction and total depreciation; the full value of the property is calculated by adding the cost of the land plot to the residual value of buildings and structures.

The cost approach requires separate assessment land cost.

The cost approach to the valuation of machinery and equipment is based on the principle of substitution, the meaning of which is that if there are several similar objects, one of them, which has the lowest price, is in greatest demand. To determine the cost of restoration or replacement cost, which is the basis of calculations in the cost approach, it is necessary to calculate the costs associated with the creation, acquisition and installation of the object being valued. In the cost approach to the valuation of machinery and equipment, the following main methods can be distinguished: method of calculation based on the price of a homogeneous object; element-by-element calculation method; index method of assessment.

When using the cost approach when valuing intangible assets, the following are used: the creation cost method and the cost gain method.

Determination of the value of goodwill (business reputation) is calculated based on the assessment of excess profits.

The assessment of financial investments is carried out based on their market value on the date of assessment and is the subject of close attention of the appraiser.

Inventories are valued at current prices, taking into account transportation and warehousing costs. Obsolete inventory is written off.

Deferred expenses are measured at face value if the associated benefit still exists. If there is no benefit, then the amount of future expenses is written off.

When assessing receivables, an analysis is carried out based on the timing of their repayment and identification of overdue debts. Unwritten receivables are valued by discounting future principal and interest payments to their present value.

In a transition economy, many business entities are not able to survive in competition and provide the financial indicators necessary for normal life. To evaluate primarily such enterprises (often called property-owned ones), the cost approach is used. Its ideological basis consists in assessing the market value of assets still remaining at disposal or certain costs of constructing a new comparable facility. Most often, such assets are the property remaining at the disposal of the object, and not the results of its production and economic activities. Therefore, in many literary sources this approach is called property approach. But the cost approach is also applicable to efficiently functioning facilities.

The financial basis of the cost approach is the balance sheet of the object. However, due to inflation, changes in market conditions and the influence of many other factors, the book value of assets differs significantly from the market value. Therefore, it is necessary to first assess the current market value of each asset on the balance sheet separately. The value of the enterprise's liabilities is also subjected to the same procedure. Using the cost approach, different types of cost are determined depending on the purpose of the assessment.

For the purpose of purchasing and selling an object, it is calculated market value, for taxation - replacement cost; upon liquidation of an enterprise - its salvage value, to justify new construction - replacement cost.

The ultimate goal of using the cost approach is to calculate the estimated value of the enterprise's equity capital. The basic model for this calculation is:

C = PV A – PV obligatory

where C is the equity capital of the object; PV A - the total market value of all assets of the enterprise; PV liability is the current value of the enterprise's liabilities.

The cost approach to enterprise valuation is mainly implemented using two methods: net asset value and liquidation value.

Net asset method, in world practice often called asset accumulation method, based on the definition market value of all assets of the object: material (land, buildings, equipment, inventories), financial and intangible (trademark, know-how, patents, licenses, etc.). It includes the following main steps:

Assessment of the market value of the object's real estate;

Determination of the market value of machinery and equipment;

Identification and assessment of intangible assets;

Determining the market value of financial investments, both long-term and short-term;

Converting the accounting value of inventory into current value;

Estimation of accounts receivable and deferred expenses;

Translation of the object's liabilities into current value;

Determining the value of equity capital using the basic formula.

Market value of the assessed material assets of the object, which includes real estate, machinery and equipment. Their size is determined taking into account wear. At the same time, under wear and teardo not understand the amount of accounting depreciation(depreciation charges based on service life), and loss of value due to physical destruction, technological (structural) imperfections, changes in the economic situation, etc.

Loss of value due to aging, rising costs of repair and maintenance of obsolete equipment and other physical factors that reduce the life and usefulness of an object is called physical obsolescence.

A decrease in the value of an object caused by the loss of the ability to perform some of its inherent functions is considered functional obsolescence. Usually it manifests itself due to design flaws, which cause an increase in the costs of maintaining the facility in operational condition. A type of functional obsolescence is technological, which manifests itself under the influence of changes in product production technology that reduce the productivity of an object.

Economic obsolescence call the loss in value of an asset caused by market conditions: increased competition, decreased demand for products, etc.

Inventory, as a rule, are valued by their expected selling price. Obsolete inventory is usually written off.

Financial assets, consisting of accounts receivable, purchased securities and deferred expenses, are assessed in accordance with their specifics. Securities usually have a certain market price, which is considered their value. Receivables are divided according to the timing of their occurrence: overdue ones are written off (partially or completely), future ones are discounted. Deferred expenses are measured at their nominal value if they prove to be profitable.

Intangible assets usually include: the enterprise’s trademark, its regular clientele, concluded contracts for the supply of its own products and resources necessary for production, received (or acquired) patents, licenses, know-how, selected personnel, etc. For the most part, assessing them individually is quite difficult.

In Western practice, the concept is generally used to evaluate intangible assets goodwill, which is understood as the totality of all elements of a business that encourage customers to continue to give preference to the products or services of a given entity. Thus, goodwill cannot be separated from the object and cannot be subject to purchase and sale on its own. There are many ways to calculate goodwill, but, as a rule, assess goodwill two of them : using the Tobin coefficient, when the market value of an enterprise exceeds the book value of its assets, or as excess profit. The algorithm for the latter is as follows. First, the market value of tangible assets is determined. Then the average industry return on equity is determined, from which the profit received on tangible assets is calculated (by multiplying the industry return by its value of assets). The difference between profit from production and economic activities and profit from tangible assets represents excess profit.

Part of the intangible assets, consisting of patents and licenses, can be valued using the concept of “royalty”, i.e. remuneration received by the owner of a patent under a licensing agreement for the right to use by others (usually in the form of a certain percentage of income from sales of products obtained using the patent).

The total market value of tangible, financial and intangible assets represents market value of the entire capital of the enterprise.

Short-term and long-term liabilities of the enterprise are transferred to their current value.

The difference between the market value of the entire capital of an enterprise and the current value of its liabilities is the market value of the enterprise obtained using the net asset method.

Liquidation value method technologically similar to the net asset method. Its distinctive feature is that the amount of current costs associated with the liquidation of the enterprise is subtracted from the value of equity capital determined using the net asset method. Such costs include payment for an order for the assessment of assets, legal services related to the liquidation of the enterprise, taxes and fees that are provided for during the sale. They also include costs for maintaining inventory and unfinished products, equipment, buildings and structures, administrative costs for maintaining the enterprise until its liquidation is completed, severance pay and payments to personnel in connection with their dismissal. The liquidation value thus obtained is adjusted by the amount of profit (loss) received from the main production activity during the liquidation period.

The main advantage of cost-effective methods approach is that the estimates they obtain are based on the actual values owned by the property. This makes it possible to carry out assessments even in the absence of retrospective data on production and financial results, so they are also suitable for assessing new objects. The world practice of valuation activities shows that when using three approaches (income, comparative and costly) for the same object, significantly different valuation values are obtained. Therefore, several methods belonging to different approaches are usually used. By calculating the weighted average cost based on the weight of each of them, the final value of the assessment is determined.

Weight of the method depends on the purpose of the assessment and the reliability of the information used. When evaluating investment projects, the greatest share is given to the discounted cash flow method, when liquidating an enterprise - to the liquidation method, when buying and selling - to the capital market, etc.

The ultimate goal of using the cost approach is to calculate the estimated value of the enterprise's equity capital. The basic model for this calculation is:

C = PV A – PV obligatory

where C is the equity capital of the object; PV A - the total market value of all assets of the enterprise; PV liability is the current value of the enterprise's liabilities.

The cost approach to enterprise valuation is mainly implemented using two methods: net asset value and liquidation value.

Assessment of the market value of the object's real estate;

Determination of the market value of machinery and equipment;

Identification and assessment of intangible assets;

Determining the market value of financial investments, both long-term and short-term;

Converting the accounting value of inventory into current value;

Estimation of accounts receivable and deferred expenses;

Translation of the object's liabilities into current value;

Determining the value of equity capital using the basic formula.

Economic obsolescence call the loss in value of an asset caused by market conditions: increased competition, decreased demand for products, etc.

Inventory, as a rule, are valued by their expected selling price. Obsolete inventory is usually written off.

The total market value of tangible, financial and intangible assets represents market value of the entire capital of the enterprise.

Short-term and long-term liabilities of the enterprise are transferred to their current value.

The difference between the market value of the entire capital of an enterprise and the current value of its liabilities is the market value of the enterprise obtained using the net asset method.

at the rate: "Business Valuation"

on this topic: « BUSINESS ASSESSMENT USING A COST APPROACH. METHOD FOR CALCULATING THE VALUE OF NET ASSETS"

Introduction

When selling a company, it is necessary to objectively assess its ability to increase its value, to be profitable, i.e. bring income to the owner. Those. it is necessary to calculate the market value of the enterprise - the most likely price of the enterprise at which it will be sold.

Calculation of the market value of an enterprise can be carried out using three fundamentally different approaches: the income approach, the market (comparative) approach and the cost (property) approach.

In this course work a cost-based approach to valuation is used, the relevance of which is primarily due to the availability, as a rule, of reliable initial information for calculation, as well as the use of methods traditional for the domestic economy for assessing the value of a business, based on an analysis of the value of the enterprise’s property and its debt.

The lack of necessary conditions for the use of income and market approaches justifies the use of a cost approach to valuation. The use of the market approach is limited by the lack of information on the sale of existing enterprises, which does not make it possible to use the transaction method. A “weak” stock market limits the possibility of using the capital market method. And the lack of market information on the financial and economic activities of enterprises similar to the one being assessed excludes the possibility of using the method of valuation multipliers.

Lack of necessary and sufficient market information on capitalization and income discounting rates. Limits the use of income approach methods (capitalization method and discounted cash flow method)

Main target of this course work – evaluate the enterprise by determining its market value for the current period.

To achieve this goal, the following are defined: tasks :

· Study the theoretical aspects of business valuation using income, property and market approaches.

· Identify positive and negative sides application of the property approach to business valuation.

· Identify the features of applying this approach both in modern market conditions and in the enterprise.

Object Research in this course work is the use of a cost approach to business valuation.

Subject The study is the application of a method for calculating the value of net assets in an enterprise.

Chapter 1. Theoretical aspects property approach to business valuation

1.1. The essence and scope of application of the property approach

The property (cost) approach to business valuation considers the value of the enterprise from the point of view of the costs incurred. The book value of an enterprise's assets and liabilities due to inflation, changes in market conditions, and accounting methods used, as a rule, does not correspond to market value. As a result, the appraiser is faced with the task of adjusting the balance sheet of the enterprise. To do this, the reasonable market value of each balance sheet asset is first assessed separately, then the current value of the liabilities is determined, and finally, the current value of all its liabilities is subtracted from the reasonable market value of the total assets of the enterprise. The result shows the estimated value of the enterprise's equity.

Equity = Assets - Liabilities.

The main feature of the cost approach is an element-by-element assessment, that is, the property complex being assessed is divided into its component parts, each part is assessed, and then the value of the entire property complex is obtained by summing the costs of its parts.

The basic formula in the property (cost) approach is: Equity = Assets - Liabilities.

This approach is represented by two main methods:

net asset method; liquidation value method.

Scope of application

The cost-based valuation approach is the most appropriate:

When assessing government facilities;

When calculating the value of property that is intended for special use (without generating income), these are schools, hospitals, post office buildings, cultural facilities, train stations, etc.;

When revaluing fixed assets for accounting purposes;

When assessed for tax and insurance purposes when judicial section property;

When selling property at public auction.

1.2. Advantages and disadvantages of the property approach

Advantages:

· based on an assessment of existing assets, i.e. has an objective basis;

· when valuing individual components of assets, all three approaches to valuation can be used: income, cost and market.

Flaws:

· static, i.e. does not take into account business development prospects;

· does not take into account the main financial and economic indicators of the activity of the enterprise being assessed.

1.3. The main stages of calculating the value of a business using the net asset method

Calculation of the net asset value method includes several stages:

1. The real estate of the enterprise is assessed at a reasonable market value.

2. The reasonable market value of machinery and equipment is determined.

3. Intangible assets are identified and assessed.

4. The market value of financial investments, both long-term and short-term, is determined.

5. Inventories are converted to current value.

6. Accounts receivable are assessed.

7. Future expenses are estimated.

8. The enterprise's liabilities are translated into current value.

9. The value of equity capital is determined by subtracting the current value of all liabilities from the reasonable market value of the amount of assets.

1.4 Valuation of the enterprise’s real estate at a reasonable market value.

The valuation of an enterprise's real estate can be given using three approaches: income, comparative (market) and cost.

1.4.1. Application of the income approach

The income approach to real estate valuation includes two methods:

Income capitalization method;

Discounted cash flow method.

Income capitalization is a set of methods and techniques that allows you to evaluate the value of an object based on its potential to generate income. The income capitalization method is used to value real estate that generates income for the owner. Income from owning real estate can, for example, represent current and future income from renting it out, income from a possible increase in the value of real estate when it is sold in the future. The result of this method consists of both the cost of buildings, structures, and the cost of land.

Net operating income is chosen as an indicator describing future income. It represents the calculated steady value of the expected annual net income received from the subject property after deducting all operating expenses and reserves, but before servicing mortgage debt, if any, and taking into account depreciation charges. Net operating income is based on the assumption that the property will be leased at market rents and on the assumption that this income is projected for one representative year.

The value of real estate is calculated using the formula:

C = NAV / Capitalization rate,

Where C is the current value of the property;

NOR – net operating income;

SC – capitalization rate.

The calculation of net operating income begins with the calculation of gross potential income (GPI), which is the expected total market rent. And other income of the latter before the valuation date of the year. Calculation of the PPV requires the appraiser to know the rental market to which the property being valued belongs. As a rule, the rental rate depends on the location of the property, its physical condition, the availability of communications, the lease term, etc.

Potential gross income is the income that can be received from real estate at 100% utilization without taking into account all losses and expenses. PPV depends on the area of the property being assessed and the established rental rate and is calculated using the formula:

PVD = P * Ca, Where

P - area for rent,

Ca - rental rate per 1 square meter.

That is, the PVD is assessed based on the analysis current rates and tariffs existing in the real estate market for comparable properties. The appraiser must compare the property being appraised with other similar rental properties and make adjustments for differences between them. If the objects are similar except for one or more significant components, then adjustments can be calculated based on market data. When the amount of the adjustment cannot be confirmed by market data, the appraiser determines it by expert means.

However, the calculated ERP may be changed due to vacancies (underutilization) of the property or shortfall in rent collection. That is, the estimated losses from underutilization of the property and losses during collection of payments are assessed. Reducing the air pressure by the amount of losses gives actual gross income(DVD), which is determined by the formula:

DVD = PVD - Losses .

To obtain the NOR, a cost analysis is carried out. Owner's expenses are the ongoing costs associated with owning and operating a property. Periodic expenses to ensure the normal functioning of the facility and the reproduction of income are called operating (maintenance) expenses.