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Overview of deprival value
Definition Calculating Meaning
(University of Gloucestershire)
2. Calculating
Deprival value
Recoverable value
Min
Economic value
Max
Recoverable value
The higher of Net realizable value and value in use
Deprival Value:
Prudence concept in accounting Opportunity cost
Economic value
The present value of the future cash flows expected to be derived from an asset or cashgenerating unit
- Play an important role in corporate finance - Have special meanings both outside and inside the
firm
Outside : be closely monitored to the market value. Inside : determine the value which this asset brings about.
Title
Deprival value
Fair value
Usage
-Special meanings both outside and inside of the firm -Outside :be closely monitored to the market value -Inside : determine the value which this asset brings to the enterprise.
-A rational and unbiased estimateof the potential market price of a good, service, or asset
Elements of determining
-Net replacement cost -Realisable value -Economic value (value in use) -Determine exchange in market to caculate replecement cost -Estimate the assets revenue each year of remaining life to caculate economic value. - Discourage inefficient investment - Provide information on the economic value of the RAB
-Market approach -Cost approach -Income approach Level 1: quoted prices in active markets for identical assets at the measurement date Level 2: valuation based on observable markets Level 3: using a valuation technique. -Provide a theoretical and practical base for asset revaluation -Do not deny original cost -Narrow scope of application of the prudence in the use of net realizable value when asset discarded.
Levels to measure
Advantages
Disadvantages
- Complexity - Require assumptions and forecasting to estimate future cash flows - Circularity problem arises because the future cash flows will determine the value of the regulatory asset base, however the future cash flows depend on the value of the regulatory asset base.
- Be unsure about its reliability - Be abused in the absence of market value - Changes of market make financial statements easier to change ->making investors be nervous
Considering to apply fair value - Level 1: quoted prices in active markets dont have active market level 1 is unable to use - Level 2: valuation based on observable markets difficult to observe because differences between each country, no common market to determine. - Level 3 : Using a valuation technique very compound Fair value is unable to apply in this case
Step 2 : Estimating the future revenue and calculating the net present value of future revenues derived from the transmission or distribution service provided by the network segment.
Step 3 : Determining deprival value for individual segments of an electricity network
No secondhand market in which a replacement asset in the same condition could be purchased. The market will be so imperfect
AEC = Where = annuity factor for t years at r % NPV = Net present value We have : AEC =
Here AEC =
Assuming AEC= annual cost of using the machine= cost prepared to pay to hire the machine
Step 2: Calculating
We have : Deprival value at the end of year 2 = Present Value of the difference = 61,423