A Business Valuation Framework for Asset Measurement

Accounting

Speaker:Christine Botosan, University of Utah
Website: http://faculty.utah.edu/u0130305-Christine_Ann_Botosan/biography/index.hml
Date: Wednesday 12 March 2014
Time: 14.00 - 15.30
Location: Bateman Lecture Theatre, Building One

Further details

A Business Valuation Framework for Asset Measurement:

The primary objective of this commentary is to offer a framework for addressing the questions – 

Which asset measurement approach provides investors with decision-useful financial reporting information and why

We utilize a business valuation perspective and focus on the information needs of external users, lacking the power to direct the management and policies of the entity, ultimately interested in assessing the going concern value of the firm (i.e. “investors”).

We argue that the asset measurement investors find useful in determining firm value depends on how the asset is expected to realize value for the firm: in-exchange or in-use. How an asset is expected to realize value for the firm is primarily a function of its business model. We propose that for assets generating value-in-exchange, the measurement basis that provides investors with decision-useful financial information is fair value determined by exit price in a hypothetical market exchange, less expected costs to sell. In contrast to other asset measurement frameworks, we maintain this conclusion even in the absence of an observable market exchange value for an in-exchange asset.

Further, we propose that for assets generating value-in-use, the measurement basis that provides investors with decision-useful financial information is historical cost because historical cost information is useful to investors in forecasting future cash flows from in-use assets.