Understanding Asset and Liability Valuation Concepts

Valuation Criteria

Historical Cost

For Assets: The purchase price or production cost. This includes the amount of cash paid or payable, plus the fair value of any other consideration given for the acquisition. All costs directly related to the acquisition and necessary to bring the asset to operating condition are included.

For Liabilities: The value corresponding to the consideration received in exchange for incurring the debt. In some cases, it is the amount of cash expected to be paid to settle the liability in the ordinary course of business.

Fair Value

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between knowledgeable, willing market participants at the measurement date. It is determined without deducting transaction costs that might be incurred on sale or disposal. Generally, it is calculated by reference to a reliable market value, often the quoted price in an active market.

Amortized Cost

The effective interest rate used to calculate amortized cost is the rate that exactly discounts estimated future cash flows over the expected life of a financial asset or liability to its initial book value. This calculation considers the contractual conditions but excludes future credit losses.

Net Realizable Value (NRV)

The estimated selling price in the ordinary course of business, less the estimated costs of completion (for raw materials and work-in-progress) and the estimated costs necessary to make the sale.

Residual Value

The estimated value of a fixed asset at the end of its useful life.

Fixed Asset Impairment

A reduction in the recoverable amount of a fixed asset below its carrying amount, often due to market value declines. This loss is recognized based on the principle of prudence. Impairment losses may sometimes be reversible.

Subsidies (Grants)

There are two types:

• Refundable: Recorded as liabilities.
• Non-refundable: Accounted for as income. Recognized systematically and rationally in the profit and loss account (P&L) as income, correlated with the costs the subsidy is intended to compensate.