Brands, the balance sheet and company value: excluding earning power as a basis for valuing assets leads to a new balance sheet formula

Article Abstract:

The Institute of Chartered Accountants of Scotland has issued a report that states that companies should explain the difference between a company's balance sheet total and the value of the company, raising the issue of whether the balance sheet should reflect the company's value. Companies are mechanisms for generating revenue, a process shown in the accounts; the market capitalization of a firm is not related to the value in the balance sheet. The direct cash flow statement is a most useful part of financial statements in that assessments of future cash flow and is most useful to financial statement users. Thus, assets such as brands should not be valued at a discounted value of the corporate entity's cash flow. Balance sheets are used to estimate cash flows, and valuing assets in the balance sheet would lead to confusion.

Great Britain

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Melody PLC: a step towards valuable reports

Article Abstract:

The Institute of Chartered Accountants of Scotland issued a report in May 1988, Making Corporate Reports Valuable, which suggested that financial reporting could be improved if accounts were made to portray economic reality by being based on value and not cost, and that management information should be offered to investors and other financial report users. The Institute's Research Committee arranged with a subsidiary of a publicly-listed Scots company, Grampian Holdings plc, to implement the proposals, the results of which have been issued in a report, Melody plc. Among the unique features of the report, the financial statements contain value-based information and the assets are shown at current market value rather than historical cost, and the report makes use of forecasts relevant to financial reports users.

Management, Grampian Holdings PLC, Melody Plc.

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