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Deprival value

& The ability to apply the case in Viet Nam

Content
Overview of deprival value
Definition Calculating Meaning

Analyzing deprival value


Comparing with fair value Case study

I. Overview of deprival value

1. Definition of Deprival value


The value to the business of any asset can be defined as its deprival value, i.e. by how much the company would be worse off if it were to be deprived of the asset

(University of Gloucestershire)

2. Calculating
Deprival value

Net replacement cost

Recoverable value
Min

Net realisable value

Economic value
Max

Net replacement cost


Value in exchange in the market in which the company can purchase the item

Recoverable value
The higher of Net realizable value and value in use

Deprival Value:
Prudence concept in accounting Opportunity cost

Net realisable value


expected selling price minus any cost to sell

Economic value
The present value of the future cash flows expected to be derived from an asset or cashgenerating unit

I. Overview of deprival value


3.Purpose of using deprival value

- 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.

I. Overview of deprival value


2. Calculating
When will the firm use deprival value ?

Example : An big air conditioner


- Costs: 100,000 - five-year life. - Future revenue = 20,000. - Scrap value: 6,000. - Replacement cost : 70,000
Lower of
Net replacement cost ( 70,000) Recoverable value Economic value
(20,000)

Net realisable value (6,000)

Deprival value is value or valuation technique ?

II. Analyzing deprival value

1. Comparing deprival value and fair value


a. Overview
Deprival value and fair value : measurement of the elements of financial statements.

b. Comparing deprival value and fair value

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

II. Analyzing deprival value


2. Case study to apply in Viet Nam

a. Case study to apply deprival value in Viet Nam


Determining the value of electricity network
b. Analyzing case study

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

Using deprival value: to determine the value of electricity network


Step 1 : Calculating replacement cost Expanding the replacement cost to Depreciated Optimized Replacement Cost (DORC) , and giving formula to caculate the DORC :

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

II. Analyzing deprival value

3. Solution for some special application of deprival value

No secondhand market in which a replacement asset in the same condition could be purchased. The market will be so imperfect

II. Analyzing deprival value


Case study
An asset has:

Costs: 100,000 - five-year life.

Annual operating costs: 20,000.


An overhaul costing: 15,000 (end of 3 ) Scrap value: 6,000.

Companys cost of capital: 10% per annum.

- Assuming annual value is constant

II. Analyzing deprival value


Solution
Step1 : Using annual equivalent cost (AEC).

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

II. Analyzing deprival value

We have : Deprival value at the end of year 2 = Present Value of the difference = 61,423

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