Fair value

Fair value (fair value) is also called fair market value and fair price. The price determined by familiar buyers and sellers under fair dealing conditions, or the transaction price at which an asset can be bought and sold between unrelated parties under fair dealing conditions. Under the acquisition method, the acquiring company needs to use fair value information to record the combined business. The determination of fair value requires the professional judgment of accountants. In practice, an asset appraisal agency usually evaluates the net assets of the merged enterprise.

The fair value of the net assets of the merged enterprise can be determined as follows: (1) Marketable securities are determined based on the current net realizable value (see "Net Realizable Value"); (2) Accounts receivable and accounts receivable The value of the bill is determined based on the amount expected to be collected in the future, discounted at the actual interest rate at the time, less estimated bad debt losses and collection costs; (3) Completed products and merchandise inventories are determined based on the estimated selling price less realization costs and reasonable costs. The balance after profit is determined; (4) Work-in-progress inventory is determined according to the estimated selling price of the completed product minus the costs to be incurred until completion, realization expenses and reasonable profits; (5) Raw materials are determined according to the current replacement price Cost determination; (6) Fixed assets should be treated according to different situations: fixed assets that can continue to be used shall be valued at the current replacement cost of fixed assets with similar production capacity, unless the future use of these assets is expected to have a greater impact on the purchasing enterprise. Low value; for fixed assets that will be sold, or held for a period of time (but not used) and then sold, they can be valued at net realizable value; for fixed assets that are temporarily used for a period of time and then sold, the future use period shall be determined after confirming the future use period. After depreciation, it is valued at net realizable value; (7) Identifiable intangible assets such as patent rights, trademark rights, lease rights, land use rights, etc. are valued at assessed value, and goodwill is calculated as the difference between the investment cost of purchasing the enterprise and the recognized fair value. (8) Other assets, such as natural resources and long-term investments that cannot be traded on the market, are determined based on the assessed value; (9) Accounts payable, notes payable, long-term loans and other liabilities are discounted based on the current interest rate based on the amount to be paid in the future. The amount of current income is determined; (10) Contingent matters and agreed obligations, such as payments caused by unfavorable lease agreements, contract constraints on the enterprise, and upcoming fixed asset liquidation costs, etc., should be fully estimated and calculated according to the The amount expected to be paid is valued at its present value discounted at the then effective interest rate.

As long as certain identifiable assets and liabilities belong to the merged enterprise, their fair value must be determined, such as the enterprise's research and development costs, action plan costs, development costs of a certain formula, etc.

The significance of determining the fair value of the net assets of the merged enterprise (1) serves as the base price of the merged enterprise and forms the basis for determining the performance value of both parties in the property rights transaction; (2) the fair value of the net assets and the net assets The difference between the book value is the appreciation or depreciation of the net assets of the merged enterprise; the difference between the investment cost of purchasing the enterprise and the fair value of the net assets of the merged enterprise is goodwill or negative goodwill (see "Goodwill and Negative Goodwill" "Goodwill"); under the full equity method, the above difference must be amortized within the asset's beneficial period, so fair value is one of the important basis for determining the value of goodwill (see "Equity Method"). Although it is recorded at book value under the pooled equity method, fair value still has special significance for it, that is, fair value is still used as the basis for determining the number of shares payable in exchange for net assets to make the transaction more reasonable.

Measurement of fair value and its impact in the new accounting standards:

1. Measurement of fair value of investment real estate and its impact

"Accounting Standards for Business Enterprises No. Investment real estate regulated in No. 3 - Investment Real Estate refers to real estate that can be measured and sold separately and is held by an enterprise to earn rent or capital appreciation, including leased buildings, leased or held And prepare the land use rights that will be transferred after value-added, etc. This standard provides two optional measurement models, the cost model and the fair value model, for an enterprise's investment real estate. Under the cost model, investment real estate is depreciated or amortized in accordance with the standards for fixed assets and intangible assets, and is subject to impairment testing at the end of the period to make corresponding impairment provisions; when there is conclusive evidence that its fair value can be continuously and reliably obtained Yes, enterprises can adopt the fair value measurement model. The depreciation, impairment or amortization value of land use rights of investment real estate measured at fair value is directly reflected in changes in fair value, and affects corporate profits through "gains and losses from changes in fair value", without being separately accrued.

Affected by this, in the context of the current continuous rise in real estate prices, commercial and real estate companies that own buildings for rent or hold land use rights to be appreciated will be favorably affected. However, the houses and buildings for sale owned by real estate development companies are accounted as the company's inventory, and their valuation basis still adopts the cost model and is not affected by the appreciation of fair value. Even if this type of enterprise resells its houses and buildings to rent in order to apply the fair value measurement model, in the first year of implementation of the standard, the excess of its fair value over the book cost can only be adjusted to the shareholders' equity at the beginning of the period. without affecting the current year's profits. Therefore, there is no theoretical basis for predicting that the real estate industry will experience a large-scale performance increase in 2007 due to changes in new accounting standards. Of course, if the real estate market remains in a bull market during or after 2007, the benefits brought to the industry by the new accounting standards will gradually emerge.

2. Fair value measurement of financial instruments and its impact

According to the "Accounting Standards for Business Enterprises No. 22 - Recognition and Measurement of Financial Instruments", financial instruments measured at fair value Mainly include trading financial assets and financial liabilities, such as stocks, bonds, funds, etc. purchased from the secondary market by enterprises to make full use of idle funds and earn price differences; another example is derivatives that are not used as effective hedging tools by enterprises. Instruments such as forward contracts, futures contracts, swaps and options, etc. In addition, enterprises can directly designate certain financial assets or financial liabilities to be measured at fair value based on risk management needs or to eliminate inconsistencies in accounting recognition and measurement of financial assets or financial liabilities. The reported value of these financial instruments measured as fair value is the market value, and changes in them are directly included in the current profits and losses. This also means that if a company can better grasp the market conditions and trends, its performance will increase as the "profit and loss from changes in fair value" increases; on the contrary, if the company's investment strategy is inconsistent with the market conditions, its current profits will be accordingly damaged. Therefore, the measurement attribute of fair value can be considered as a "double-edged sword", which is very different from the old standard's "lower-or-lower" method that "only reports worries but not good news", which often causes the reported value of financial instruments to be underestimated.

3. Fair value measurement of other businesses and its impact

According to incomplete statistics, in the new accounting standards system, there are at least 17 of the 38 specific standards that have been promulgated. Fair value measurement attributes are used to varying degrees. In addition to the two items analyzed above, the matters that have a greater impact on the company include non-monetary asset exchanges, debt restructuring, and business mergers under non-independent control. matter. The reason why the new accounting standards adopt the fair value measurement model for these transactions or events is mainly due to the principle of substance over form. For example, for the exchange of non-monetary assets with commercial substance between enterprises, the use of fair value to measure the assets exchanged and exchanged in is essentially the recognition of the "sale" and "purchase" of the enterprise's non-monetary assets, and the "sale" of the enterprise's non-monetary assets. "The difference between the fair value and the book price of an asset is the income realized by the company. Under the old accounting standards, similar businesses can only be valued at book cost, and the difference between fair value and book value cannot be recognized as corporate profits and losses; similarly, if a company uses the fair value of non-monetary assets to pay off debts in debt restructuring, If the value is higher than its book value, the higher part, together with the debt forgiveness obtained, can increase the current profit; in a business merger not under the same control, the fair value of the assets paid and liabilities incurred or assumed by the buyer The difference between its book value and its book value is reflected in the company's current profit and loss. The adoption of the fair value measurement model in these transactions overcomes the shortcomings of underestimating the value of corporate assets due to the adoption of the cost pricing model, thereby more truly reflecting the corporate asset value and operating performance.

Examination of the "fair value" of the new accounting standards. Recording the assets and liabilities of the merged company according to the "fair value" will bring the benefits of tax deferral to the participants in the merger and acquisition integration. "Reputation" treatment, the new standards give companies greater flexibility. This is in line with international practice and is structurally positive for industries with active mergers and acquisitions.

With the replacement of old and new accounting standards, the concept of "fair value" may be the most concerned in the capital market. This is also the biggest change in the integration of new accounting standards with international accounting standards, and the depth and breadth of its impact It is difficult to predict with any specificity at this time.

However, first of all, it is clear that "fair value" only affects accounting information and does not affect the company's actual operations. From the perspective of DCF valuation, the impact on the company's value is limited. In addition, "New Accounting Standards No. 3 - Investment Real Estate" clarifies that the scope of investment properties it regulates is: "1. Land use rights that have been leased; 2. Land use rights that are held and prepared to be transferred after appreciation; 3. Leasing buildings", therefore, real estate companies and commercial retail companies are very little affected by the changes in the new standards. Most of their properties do not apply to this standard. "Value revaluation" is particularly important in these two industries. In the retail industry, the concept of "net realizable value" is reflected to a greater extent, and its stimulation should be attributed more to mergers and acquisitions rather than changes in accounting standards.

The impact of "fair value" on accounting information is mainly reflected in two new standards - "Accounting Standards for Business Enterprises No. 3 - Investment Real Estate" and "Accounting Standards for Business Enterprises No. 20 - Business Mergers" 》. In the case of a business merger involving companies not under the same controller, if there is a significant change in the business entity, the assets and liabilities of the acquired party will be recorded as "fair value", which will not affect the principles of consistency and comparability. In terms of income tax, there will be no significant handling. Big controversy, because in the process of M&A transactions, it is unlikely to realize "current income", and even if it is realized, the amount will be limited. In business mergers, "fair value" is the method that must be used. The merger premium paid by the acquiring company is divided into two parts: 1) assets and liabilities are recorded at "fair value", 2) the part of the consideration paid that exceeds "fair value" , recorded as "goodwill", it is therefore reasonably foreseeable that the base of future asset depreciation of the merging company will exceed the simple sum of the merging companies, thus producing the effect of income tax deferral, which is a structural benefit of industrial integration.

The changes in the new standards in business mergers are also reflected in: 1) "negative goodwill" (or "merger spread") is not recorded, and the part of the consideration paid that is lower than the "fair value" is increased "Current income", although this situation rarely occurs, it is enough to attract attention: in the past, non-recurring income was brought about by the disposal of assets or equity by enterprises; in the future, business mergers under the same controller may also bring about non-recurring income. The acquiring party brings current income; 2) "Goodwill" is no longer amortized year by year, but is tested for impairment every year. Once the impairment loss is confirmed, it cannot be reversed in subsequent years. Such regulations actually give companies a lot of flexibility: if they focus on current income indicators, they do not need to deal with them; if they focus on cash flow, they can accelerate impairment to obtain income tax deferral.

However, recording "investment real estate" at "fair value" is highly controversial. Without corresponding provisions in the implementation details of accounting standards and tax laws, it is impossible to accurately predict the company's response because "Fair value" means that the company has the freedom to choose or not to choose. In the past, "investment real estate" has basically been recorded at acquisition cost or construction cost, and depreciation is taken every year. Therefore, its net book value is significantly lower than the fair value. Once the company changes the recording method, it will have a huge impact on the current profit. However, this part of the profit How to deal with the income tax liability? The following methods can be discussed:

1. The income tax liability is in the current period. It is estimated that ordinary companies will not choose to adopt this method, unless major shareholders want to issue additional shares or cash out, with the main goal of raising the stock price.

2. Income tax liability arises when the property is sold, which is in line with international practice, but is difficult to support under China's tax system. If an enterprise chooses "fair value" accounting, it will not incur current tax liability. However, impairment in subsequent years will reduce current income, which has the benefit of tax avoidance. If the supporting tax laws agree in this way, the enthusiasm of enterprises to choose "fair value" will be very high.

3. Allow businesses to amortize over several years. However, the behavior of enterprises is different and it is difficult to compare. In addition, when investment properties are traded, other taxes and fees such as land value-added tax are also incurred. It is difficult for enterprises to estimate in advance, and the comparability of subsequent years will be affected. However, enterprises choose to adopt the new standards. The enthusiasm will be higher. From the perspective of shareholder value, the best way for a company is to obtain as much tax deferral benefits as possible and reduce cash outflows. Companies that regulate accounting information with a hyped attitude regardless of long-term operating value should arouse investor vigilance.