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Tuesday, 29 March 2011

CIPPA increases a company’s net asset value

CIPPA increases a company’s net asset value


A company’s capital is synonymous with its Net Assets or Shareholders Equity under a financial concept of capital such as invested money or invested purchasing power. The Net Asset Value is equal to Assets minus Liabilities.


The intrinsic value of a company is its actual value based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors.

Most often intrinsic worth is estimated by analyzing a company's fundamentals.

Intrinsic value is the actual value of company, as opposed to its market price or book value. The intrinsic value includes other variables such as brand name, trademarks, and copyrights that are often difficult to calculate and sometimes not accurately reflected in the market price. One way to look at it is that the market capitalization is the price (i.e. what investors are willing to pay for the company) and intrinsic value is the value (i.e. what the company is really worth). Different investors use different techniques to calculate intrinsic value.

There is no single, universally accepted way to obtain this figure.

The intrinsic value of most companies will not simply increase at the moment of changeover to CIPPA with a change in accounting policy from the traditional Historical Cost Accounting model to measuring financial capital maintenance in units of constant purchasing power during low inflation and deflation because CIPPA only increases the net asset value of most companies over time in the future as compared to continuing with the traditional HCA model.


This is the case for those companies which do not have 100% of the inflation-adjusted original real values of all contributions to Shareholders´ Equity invested during low inflation in revaluable fixed assets with an equivalent maintained fair value (revalued or with unrecorded holding gains) in order not to erode Shareholders Equity’s original real value under the traditional Historical Cost Accounting model implemented by most companies.

Example

Historical Cost Accounting

Opening balances

Capital ................1000

Retained Earnings 1000

Equity .................2000

Liabilities ..................0

Total Liabilities ...2000



Fixed Assets .....1000

Trade Debtors ..1000

Total Assets .....2000


Net Asset Value = Assets – Liabilities = Equity

= [Fixed Assets + Trade Debtors] – Liabilities = [Capital + Retained Earnings]

= [1000 + 1000] – 0 = [1000 + 1000]

= 2000



Assumptions: 10% inflation during the next financial year.

Fixed Assets revalued at a rate equal to the inflation rate (only to simplify the example)

No other changes


At the end of the financial year:


Capital ..................1000

Revaluation Reserve 100

Retained Earnings  .1000

Equity ...................2100

Liabilities ....................0

Total Liabilities......2100



Fixed Assets ...1100

Trade Debtors 1000

Assets ............2100



Net Asset Value = Assets – Liabilities = Equity


= [Fixed Assets + Trade Debtors] – Liabilities = [Capital + Retained Earnings]

= [1100 + 1000] – 0 = [1100 + 1000]

= 2100



Constant Item Purchasing Power Accounting

Opening balances are the same.

Assumptions are the same.

At the end of the financial year:



Capital .................1100

Retained Earnings 1100

Equity .................2200

Liabilities ..................0

Total Liabilities ...2200



Fixed Assets ...1100

Trade Debtors 1100

Total Assets ...2200



Net Asset Value = Assets – Liabilities = Equity


= [Fixed Assets + Trade Debtors] – Liabilities = [Capital + Retained Earnings]

= [1100 + 1100] – 0 = [1100 + 1100]

= 2200



CIPPA increases the future net asset value of most companies compared to simply continuing with the current HCA model.

This will increase the net asset value of most companies listed on stock exchanges and most unlisted companies in the world economy.

When accountants change the way they value constant real value non-monetary items they generally increase the net asset values of companies too. This increases the intrinsic and market values of companies too.

Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.