Measuring and Valuation of Asset: Accounting Theory Perspective

Ruswan Nurmadi

, Sumardi Adiman

, Iskandar Muda

and Syafruddin Ginting

Faculty of Economics and Business, Universitas Sumatera Utara, Medan -Indonesia

Keywords: Measuring of the asset, valuation of the asset, accounting theory

Abstract: This article defines that measurement and valuation of the asset in accounting are important, that draw

concern of the problems that related with measurement and valuation in practice. Firms usually use different

methods techniques of measurement, financial and non-financial, and apply mixed valuation methods,

which they consider the best for their firms. Considering many factors in measuring and valuation of assets

will make the company obtain maximum benefits and reduce the risk of future use of these assets. A lot of

literature reviews show that arguments made in accounting theory perspective and business perspective of

how firms use decision-useful of their asset measurement and valuation. The terminological change from

valuation to measurement increased attention to see what accounting could gain from the classical

measurement theory. This measuring and valuation in accounting cause theoretical basis and contemporary

dilemmas, by considering between bases non-basic-resources and resources, instrumental and economic

values, between measurements and estimates and between measurement and allocation, with the main

objective to make useful assessments of possible assets to achieve firms’ goals. Although firms will be

considered a business valuation framework for asset measurement that will suit their interests, accounting

theory perspective will be one of the bases of that decision making.

1 INTRODUCTION

The definition of an asset as a resource controlled by

the entity as a result of past events and from which

future economic benefits are expected to flow to the

entity (Financial Accounting Standards Board, 2010)

has been revised as a present economic resource

controlled by the entity as a result of past events. An

economic resource is a right that has the potential to

produce economic benefits (IFRS, 2018).

Assets can be known by several characteristics.

These characteristics are a differentiator with several

things. The characteristics of assets are: Assets are

economic benefits obtained in the future; Assets are

controlled by companies that are controlled by the

company; Assets are the result of transactions or

events that occurred in the past.

There are various types that makeup assets. This

is known as the elements that are able to compile

assets as they should. The asset elements are:

Current Assets (the definition of current assets is an

asset that is expected to be realized which results in

long-term benefits of around one year or within the

traditional operational cycle of the corporate. Assets

consist of cash, short-term investments, inventory,

accounts receivable, accrued income and other

accounts, and costs to be paid); Investment /

Participation (definition of investment is an asset

that is used for the growth of wealth through the

distribution of investment returns. The investments

made in these assets are also categorized into two

types. The types of investments in assets are short-

term investments and long-term investments) ; Fixed

Assets (definition of fixed assets is tangible assets

obtained in the form that is ready to be used or

functioned or built more deeply, which are

functioned in the operations of the company, are not

intended to be sold which aim at the existence of

normal company activities and have a useful life of

more than one year. Fixed assets consist of land,

buildings, long-term investments, and others),

Intangible Assets (the definition of non-referring

assets is fixed assets that are not intangible which

are beneficial by providing economic and legal

rights to an owner. Intangible assets have different

types of forms or forms such as goodwill,

1208

Nurmadi, R., Adiman, S., Muda, I. and Ginting, S.

Measuring and Valuation of Asset: Accounting Theory Perspective.

DOI: 10.5220/0009510912081212

In Proceedings of the 1st Unimed International Conference on Economics Education and Social Science (UNICEES 2018), pages 1208-1212

ISBN: 978-989-758-432-9

trademarks, copyrights, and franchises); Other

Assets (as for the other types of assets which are

other asset elements, it is described that the items

cannot be adequately classified into current assets,

investments, ownership, intangible assets, and fixed

assets).

From the definition, characteristics, and types of

asset, its important to manage assets. (The Institute

of Asset Management, 2012) stated that asset

management is more than doing things to assets. It is

about using assets to deliver value and achieve the

organization’s business objectives. Its also brings a

different approach and way of reflection and a

transformation of organizational alignment and

organizational culture. Each organization must

determine the best way to specify its value, and how

to determine the procedures for managing its assets

in order to obtain the best total value. Asset

management must relevant to all kinds of

organization or company, whether they are large,

small, private, public, government or not-for-profit.

There is growing evidence around the world that

effective asset management can improve an

organization’s reputation and its ability to operate

safely; fulfill its regulatory and statutory obligations;

significantly minimize the cost of managing assets

over their lives; and assess future business strategies

for the delivery of differing performance, cost and

tolerable risk profiles.

In discussing the measurement and valuation of

assets, we must have an understanding of some

terms used for the valuation of assets. Historical

Cost, as the quantity of cash that paid to acquire an

asset ; Current Replacement: The amount of cash

that would have been paid to acquire currently the

best asset available in the market; Net Realizable

Value: The amount of cash expected to be derived

from sale of an asset; Net Present Value: This is

equal to expected future cash inflows—cash

outflows i.e. net cash flows. Thus for the aim of

valuation of assets, we’ve got four bases and our

selection can rely on what explicit facet of the

quality is to be measured. For an accountant, for

example, a historical cost can be used to measure the

number of monetary units spent for obtaining the

asset, and present value or replacement value can be

used to measure the physical aspect of the asset or

its replacement aspect.

Valuation of Different Types of Assets: The

method of assigning monetary values to the assets, is

valuation. Historical cost used is most commonly

used bases in traditional accounting. Other bases like

current value, replacement value or net realizable

value have also included in the process of valuation

of the assets. Valuation of Tangible Fixed Assets:

Tangible fixed assets contain long-term assets which

provide services beyond one accounting period.

They are bought with the objective not to sell. Their

value depends upon future cash flows they are

adequate of generating. Valuation of Current Assets:

Current assets also noticeable as fluctuating or

circulating assets, as cash and other assets, which are

reasonably expected to be realized in cash,

consumed or sold through the normal operating

cycle of the business. Monetary assets as if Cash,

Bank, Debtors and Bill Receivables, can be valued

with more accuracy in comparison to non-monetary

assets like stocks. In a matter of non-monetary

assets, valuation relies upon a judgment of

accountants become a difficult assignment. As

valuation of Inventories, (IASB, 2016) has defined

inventories as “Inventories are assets: Held for sale

in the ordinary course of business; In the process of

production for such sale; In the form of materials or

supplies to be consumed in the production process or

in the rendering of the services.

A lot of literature reviews show that discussions

made in accounting theory perspective and business

perspective of how firms use decision-useful of their

asset measurement and valuation. (Amihud,

Mendelson and Pedersen, 2005) reviewing the

theory of liquidity and empirical studies that

examine these theories. The theory forecasts that

both the level of liquidity and liquidity are risky, and

the empirical risk factors for controlling asset risk

and asset characteristics.

(Acharya and Pedersen, 2005) said that their

paper solves explicitly a simple equilibrium model

with liquidity risk. In their liquidity-adjusted capital

asset pricing model, a security's required return

depends on its expected liquidity as well as on the

covariances of its own return and liquidity with the

market return and liquidity. In addition, a persistent

negative shock to a security's liquidity ends up in

low contemporaneous returns and high foretold

future returns. The model provides a unified

framework for understanding the varied channels

through that liquidity risk could have an effect on

quality asset costs.

(The Institute of Asset Management, 2012)

stated that asset can be managed by extracting value

more than what you do to assets, it is about using

assets to deliver value and reach the organization’s

business goals. This article explains the importance

of valuation and measurement of the asset in

accounting, that draw attention to the problems of

valuation and measurement in practice, based on

literature researches or studies.

Measuring and Valuation of Asset: Accounting Theory Perspective

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2 THEORETICAL FRAMEWORK

Main changes in the definition of an asset are (IFRS,

2018): separate definition of an economic

resource—to clarify that an asset is an economic

resource, not the ultimate inflow of economic

advantages; deletion of ‘expected flow’—it doesn’t

ought to make sure, or maybe seemingly, that

economic advantages can arise; an occasional

likelihood of economic advantages would possibly

have an effect on recognition decisions and the

measurement of the asset. (IFRS, 2018) also

describes measurement. Historical cost measurement

bases noted that historical cost provides information

derived, at least in part, from the price of the

transaction or other event that gave rise to the item

being measured, historical price of assets is reduced

if they become impaired and historical price of

liabilities is accumulated if they become

burdensome, a method to use a historical cost

measuring basis to monetary assets and monetary

liabilities is to live them at amortized value. Current

value measurement bases include fair value (the cost

that would be received to sell an asset, or paid to

transfer a liability, in a presentable transaction

between market participants at the measurement

date; reflects market participants’ current hopes

about the timing, amount, and uncertainty of future

cash flows), value in use for assets (reflects entity-

specific current hopes about the timing, amount, and

uncertainty of future cash flows) and current cost

(reflects the current amount that would be paid to

achieve an equivalent asset).

(IFRS, 2018) express that the factors to be

considered when selecting a measurement basis are

relevance and faithful representation because the

purpose is to supply information that is useful to

lenders, investors, and other creditors. Relevance of

information supplied by a measurement basis is

influenced by characteristics of the asset or liability

(the variability of cash flows; sensitivity of the value

to market factors or other risks; for example,

amortized cost cannot provide relevant information

about a derivative) and contribution to future cash

flows (whether cash flows are generated directly or

indirectly in combination with alternative economic

resources; the character of the entity’s business

activities; as an example, if assets are utilized in

combination to provide products or services,

historical value can offer relevant information about

margins achieved in a period). Whether a

measurement basis can offer a faithful representation

is affected by: measurement inconsistency (if

financial statements content measurement

inconsistencies (accounting mismatch), those

financial statements may not faithfully represent

some aspects of the entity’s financial position and

financial performance) and measurement uncertainty

(does not necessarily avoid the use of a

measurement basis that provides relevant

information ; but if too high might make it necessary

to consider selecting a different measurement

basis.is essentially a process that is marked by

changes in a person.

In accounting theory perspective, it can not be

separated from the Agency Theory (Jensen, M., &

Meckling, 1976). Jensen and Meckling their paper

reveal the integrate factors from the theory of

agency, the theory of property rights and the theory

of finance to construct a theory of the ownership

structure of the firm. They establish the concept of

agency costs, indicate its relationship to the control

and separation issue, inspect the nature of the agency

costs produces by the existence of debt and outside

equity, show who endures these costs and why, and

inspect the Pareto optimality of their presence. They

also give a new definition of the firm and show how

their analysis of the factors affecting the creation

and issuance of debt and equity claims is a special

case of the provisioning aspect of the completeness

of markets drawback. In various cases, company

directors are managers who are also interested in

their money, not just other people's money, so that

they cannot be fully expected, that they must watch

company directors with the same vigilance as

partners in personal business who often oversee

themselves. There is a tendency to make it easier to

get things without the proper process. This results in

negligence in the process of managing corporate

affairs. To avoid this, management must take full

responsibility in managing the company's finances.

This means that management is responsible for

managing the balance of assets, debt, and capital to

achieve the goals of companies and investors. In this

case, of course, includes the valuation and

measurement of assets.

(Barberis, Huang and Santos, 2001) reveal their

research about asset prices in an economy where

investors acquire direct utility not only from

consumption but also from

fluctuations in the

worth of their financial wealth. They are loss refuse

over these

fluctuations, and the degree of loss

aversion relies on their prior investment

performance. They find that their framework can

help clarify the excess volatility, high mean and

predictability of stock returns, as well as their low

correlation with consumption growth. The design of

their model is influenced by prospect theory and by

experimental evidence on how prior outcomes affect

risky choice.

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3 RESEARCH METHOD

This article uses literature reviews to explain about

the essence and the importance of measurement and

valuation of the asset in accounting, that draw

concern of the problems that related with

measurement and valuation in practice.

4 ANALYSIS AND RESULTS

(Riahi-Belkaoui, 2005) said that there are alternative

asset-valuation and income-determination models.

There are four attributes of assets and liabilities that

may be quantified: historical cost, current entry

price, current exit price, capitalized or the present

value of expected cash flows. Two units of measure

may be used to measure assets and liabilities: money

and purchasing power. Asset valuation and financial

gain determination models: Historical-cost

accounting, Replacement-cost accounting, Net-

realizable-value accounting, Present-value

accounting, General price-level accounting, General

price-level replacement cost accounting, General

price-level net realisable-value accounting, General

price-level present-value accounting.

(Riahi-Belkaoui, 2005) expressed that in

measuring of asset, although theoretically

considered the best accounting models, present-

value models have recognized practical deficiencies

: they require the estimation of future net cash

receipts also the temporal order these receipts, as

well as the selection of the appropriate discount rates

; when applied to the valuation of individual assets,

they require the arbitrary allocation of estimated

future net cash receipts and the timing of those

receipts as well as the selection of the appropriate

discount rates; when applied to the valuation of

individual assets, they need the discretionary

allocation of calculable future net benefit receipts

among the individual assets.

Another approach carried out by (Barberis,

Huang and Santos, 2001). They suggest a new

framework for pricing assets, derived in part from

the traditional consumption-based approach, but

which also incorporates two long-standing ideas in

psychology: the prospect theory of Kahneman and

Tversky - 1979 (Kahneman and Tversky, 1979), and

the evidence of Thaler and Johnson - 1990 (Thaler

and Johnson, 1990) and others on the influence of

previous outcomes on risky alternative. Consistent

with prospect theory, the investor in their model

derives utility not only from consumption levels but

also from changes in the value of his financial

wealth. He is rather more sensitive to reductions in

wealth than to will increase, the "loss-aversion"

feature of prospect utility. Moreover, according to

with experimental proof, the utility he receives from

gains and losses in wealth depends on his prior

investment outcomes; prior gains cushion

subsequent losses -- the so-called "house-money"

result -- whereas previous losses intensify the pain

of ulterior shortfalls (Barberis, Huang and Santos,

2001). They study asset prices in the presence of

agents with preferences of this type and find that our

model reproduces the high mean, volatility, and

predictability of stock returns. The key to our result

is that the agent's risk-aversion changes over time as

a operate of his investment performance. This makes

costs rather more volatile than underlying dividends,

and along with the investor's loss-aversion, results in

large equity premia. Their results obtain reasonable

values for all parameters (Barberis, Huang and

Santos, 2001).

(Chordia, Huh and Subrahmanyam, 2009) link

valuation of the asset with liquidity. They said that

many proxies of illiquidity have been used in the

kinds of literature and studies that connects

illiquidity to asset prices. These proxies have been

motivated from an empirical viewpoint. In their

research, they approach liquidity estimation from a

theoretical perspective. Their method explicitly

acknowledges the analytic dependence of illiquidity

on more primitive drivers such as information

asymmetry and trading activity. The empirical

results offer evidence that theory-based estimates of

illiquidity are priced in the cross-section of expected

stock returns, even after accounting for risk factors,

firm characteristics are known to influence returns,

and other illiquidity proxies prevalent in the

literature (Chordia, Huh and Subrahmanyam, 2009).

(Duffie, 2010) stated Dynamic Asset Pricing

Theory on the theory of asset pricing and portfolio

selection in multiperiod settings under uncertainty.

The asset pricing results are built upon the three

more and more restrictive assumptions: absence of

arbitrage, single-agent optimality, and equilibrium.

These results are unified with two key ideas, state

prices, and martingales. Technicalities are given

comparatively very little pressure, so as to draw

connections between these concepts and to make

plain the similarities between discrete and

continuous-time models. The new chapter is on

corporate securities that offer alternative approaches

to the valuation of corporate debt (Duffie, 2010).

(Simpson, 2010) notes cover old and new

investment methods, regulatory and legal

developments and the role of technology as a game

changer in asset management. The discussion offers

constant weight to the theoretical and practical

aspects of asset management. The focus is on

Measuring and Valuation of Asset: Accounting Theory Perspective

1211

portfolio constructions, asset pricing on the

theoretical facet. It contains an asset management

industry overview, introduce to data analytics,

blockchain, and crypto-currency, demographics and

technology (Simpson, 2010).

The opinions of the researchers about the

measurement, valuation, and management of assets

that may be different, still have the same purpose,

namely to provide a view of the importance of the

value of assets to the company as a whole.

5 CONCLUSIONS

This article reviews the views of researchers

regarding assets and how to measure and evaluate

assets, from the point of view of accounting theory.

Clearly, the importance of asset management is

clearly seen. With good asset management,

companies can guarantee the survival of their

company, by choosing the best capital structure for

the company, maintaining a balance between debt

and capital, and understanding and optimizing the

value of assets.

The process of valuing assets in providing an

estimate of economic value, both tangible assets and

intangible assets, based on the results of analysis of

objective and relevant facts using valuation

techniques, methods and principles apply.

Along with the times, of course, measurement

and valuation of assets will experience changes and

developments. But the point is, how can we use our

assets as optimally as possible to achieve our

company's goals. This will not happen without good

measurement, assessment and asset management.

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pricing with liquidity risk’, Journal of

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10.1016/j.jfineco.2004.06.007.

Amihud, Y., Mendelson, H. and Pedersen, L. H.

(2005) ‘Liquidity and Asset Prices’,

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10.1561/0500000003.

Barberis, N., Huang, M. and Santos, T. (2001)

‘Prospect theory and asset prices’, Quarterly

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10.1162/003355301556310.

Chordia, T., Huh, S. W. and Subrahmanyam, A.

(2009) ‘Theory-based illiquidity and asset

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10.1093/rfs/hhn121.

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