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Summary class preparation questions lecture 4
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Extensive but clear summary - Business Analysis and Valuation, ISBN: 9781473722651 Business Analysis and Valuation (BKBMIN053)
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Lecture 4Question 1: define the concept “recoverable amount”
Recoverable amount is the highest of the following values:
1. an asset’s fair value less costs of disposal
2. value-in-use
Definition value-in-use
Value-in-use is the present value of estimated future cash flows expected to arise from the
continuing use of an asset
is you see the word ‘ estimates’, you know potential distortions may arise
Question 2: define the concept “fair value”
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date
this definition is very specific, difficult to deviate from that
Impaired assets
Asset is impaired if book value > recoverable amount
Why a distortion?
You have to make a lot of estimates
Great are of flexibility
Impact of an impairment
Understatement
o Higher current earnings
o Higher asset values
Overstatement
o Lower current earnings
o Lower asset values
How to write down non-current assets
1. Reduce non-current tangible assets & increase other expenses
2. Reduce deferred tax liability & tax expense
3. Reduce shareholders’ equity and net profit
Liabilities =
Economic obligation that arise from benefits received in the past, have the potential of being
required to be met and cannot be feasible avoided.
Distortions in liabilities
Ambiguity whether an obligation has really been incurred
Ambiguity whether the obligation can be measured
Question 3: define the concept “deferred” or “unearned revenues”.
When are such “deferred revenues” recorded?
You have received the cash, but the product/service is not yet provided
liability is the commitment to provide the service/product to the customer
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