Dear,
One of the most sensitive topics in the Capitalist System is the recognition of the Assets Value.
As a difference of many other economic events, payment, debts, terms of payment, interest calculation, etc. Assets Valuation is a controversial matter. The first belong to the group of economic facts, the second are just opinions.
For instance; once defined the Financial Conditions of a Loan, there’s only one result of the Interests Calculation.
But there’s not a unique valuation of the value of a house (or any other asset). We can request expert appraisals, and we’ll get as many valuations as expert opinions.
Assets valuation is a critical activity. In every economic transfer, both agents (buyer and seller) need to make an agreement about the value of the transferred asset, without an agreement on the value of an asset there’s no trade and without trading there’s no modern economy.
By the way, the infamous “Toxic Assets”, responsible of the 2008 Financial Crisis are just the consequence of an abrupt disagreement in the value of some Financial Assets. As the market agents cannot agree in the trade price, the asset becomes illiquid and the market freezes. If the volume of illiquid assets and the disagreement in its value is big enough, they’re capable of triggering a huge financial crisis.
Additionally, assets valuation plays a very significant role in Capital Allocation. If the economic agents expect a revaluation of an asset or family of assets, they will see them as an investment opportunity and capital will be allocated in them. If the expected valuation is not finally translated into real Profits, the investor will have wasted Capital, the most critical resource.
Traditionally, we have worked with two families of Assets Valuation/Accounting methods; Cost Accounting and Fair Value Accounting. The first one looks at the past transactions of the asset, the second looks at the current/future realizable value of the asset.
Obviously, Historical Valuation does not estimate risk, as there’s no uncertainty in past events.
On the other hand, Risk is a very relevant Capital consumer. Historical accounting is easier to implement, but as it does not estimate Risk, it’s not accurate enough in a world of limited Capital.
Fair Value Accounting does estimate risk, but it also requires much more reliable information, confidence, transparency and disclosure; without them Fair Value Accounting is useless.
In my opinion Assets Valuation rules are going to experience a very deep transformation in the oncoming years. IFRS is just one step in the transformation that will get speed with the Systemic Change driven by the current Systemic crisis. Personally I’m an advocate of an Accounting System which looks at the value generation foundation of the Assets, as the fundamental component of the Value recognition.
http://sapbank.blogspot.co.uk/2013/07/collaterals-and-underlines-accounting.html
http://sapbank.blogspot.co.uk/2013/07/collaterals-and-underlines-accounting_27.html
We’re going to see deep changes in the next years; it sounds logic that during the transition period, multiple valuation models are going to be required. Consequently, Accounting Information Systems need to be prepared for supporting parallel accounting models, something that Bank Analyzer is ready to offer.
Looking forward to read your comments.
K. Regards,
Ferran.
One of the most sensitive topics in the Capitalist System is the recognition of the Assets Value.
As a difference of many other economic events, payment, debts, terms of payment, interest calculation, etc. Assets Valuation is a controversial matter. The first belong to the group of economic facts, the second are just opinions.
For instance; once defined the Financial Conditions of a Loan, there’s only one result of the Interests Calculation.
But there’s not a unique valuation of the value of a house (or any other asset). We can request expert appraisals, and we’ll get as many valuations as expert opinions.
Assets valuation is a critical activity. In every economic transfer, both agents (buyer and seller) need to make an agreement about the value of the transferred asset, without an agreement on the value of an asset there’s no trade and without trading there’s no modern economy.
By the way, the infamous “Toxic Assets”, responsible of the 2008 Financial Crisis are just the consequence of an abrupt disagreement in the value of some Financial Assets. As the market agents cannot agree in the trade price, the asset becomes illiquid and the market freezes. If the volume of illiquid assets and the disagreement in its value is big enough, they’re capable of triggering a huge financial crisis.
Additionally, assets valuation plays a very significant role in Capital Allocation. If the economic agents expect a revaluation of an asset or family of assets, they will see them as an investment opportunity and capital will be allocated in them. If the expected valuation is not finally translated into real Profits, the investor will have wasted Capital, the most critical resource.
Traditionally, we have worked with two families of Assets Valuation/Accounting methods; Cost Accounting and Fair Value Accounting. The first one looks at the past transactions of the asset, the second looks at the current/future realizable value of the asset.
Obviously, Historical Valuation does not estimate risk, as there’s no uncertainty in past events.
On the other hand, Risk is a very relevant Capital consumer. Historical accounting is easier to implement, but as it does not estimate Risk, it’s not accurate enough in a world of limited Capital.
Fair Value Accounting does estimate risk, but it also requires much more reliable information, confidence, transparency and disclosure; without them Fair Value Accounting is useless.
In my opinion Assets Valuation rules are going to experience a very deep transformation in the oncoming years. IFRS is just one step in the transformation that will get speed with the Systemic Change driven by the current Systemic crisis. Personally I’m an advocate of an Accounting System which looks at the value generation foundation of the Assets, as the fundamental component of the Value recognition.
http://sapbank.blogspot.co.uk/2013/07/collaterals-and-underlines-accounting.html
http://sapbank.blogspot.co.uk/2013/07/collaterals-and-underlines-accounting_27.html
We’re going to see deep changes in the next years; it sounds logic that during the transition period, multiple valuation models are going to be required. Consequently, Accounting Information Systems need to be prepared for supporting parallel accounting models, something that Bank Analyzer is ready to offer.
Looking forward to read your comments.
K. Regards,
Ferran.
No comments:
Post a Comment