Introduction of Exit Value Accounting; Exit value accounting is a form of current cost accounting which is based on valuing assets at their net selling prices (exit prices) at the balance sheet date and on the basis of orderly sales. An exit value is a maximum price a currently held asset could be sold for in the market less the transactions costs of the sale (the net realizable value for the asset). What is Economic Value Added? Definition, Calculation, and Implementation.
Know and understand the Exit Value Accounting.
This normative accounting theory was developed by Raymond Chambers and labeled as Continuously Contemporary Accounting (CoCoA). The theory relies on assessments of the exit or selling price of an entity’s liabilities and assets. These values are usually calculated under the assumption that the entity which controls the thing being valued would be going out of business and liquidating. By contrast, real-world values for things sold by companies which remain in business can be very different because these companies can afford to hold out for a good price and they are not liquidating large amounts of goods and alerting buyers to the fact that bargains may be obtainable with a little bit of negotiation.
Meaning and Definition of Exit Value Accounting:
The exit value accounting theory was developed under the following key assumptions. Firstly, firms exist to increase the owners’ wealth. Secondly, the organization’s ability to adapt to changing circumstances is the basis of successful operations and Finally, the capacity to adapt will be best reflected by the monetary value of the organization’s assets, liabilities and equities at balance date, where the monetary value is based on the current exit or selling prices of the organization’s resources.
All assets in the exit-price accounting should be recorded at their current cash equivalents which represented by the amounts expected to be generated by selling the assets and an orderly sale determine the net-sales or exit-prices. Depreciation costs would not be realized within exit-price accounting as the model is based on the current cash equivalents.
Liabilities would be similarly valued at the amounts it would take to pay them off as of the statement date. The income statement for the period would be equal to the change in the net realizable value of the firm’s net assets occurring during the period, excluding the effect of capital transactions.
Expenses for such elements as depreciation represent the decline in net-realizable value of fixed assets during the period. The exit value accounting model is based on the immediate sale, which seems under the control of the entity although some estimation of the future may be included. As a result, the asset does not contribute to an entity’s capacity to adapt to changing circumstances if it is not ready to sell (as it does not have a sales price).
In addition, the profit for a certain time should also be related to the alteration of the current exit-prices of the assets and hence, profit should reflect changes in an organization’s capacity to adapt. The benefit of exit value accounting system is the relevance of the information it provides.
With this approach, the balance sheet becomes a huge statement of the net liquidity available to the enterprise in the ordinary course of operations. It thus portrays the firm’s adaptability, or the ability to shift its presently existing resources into new opportunities.
What is Fair value?
As know, Fair Value; In accounting and in most Schools of economic thought, fair value is a rational and unbiased estimate of the potential market price of a good, service, or asset.
Explanation of Exit Value:
An exit value is the estimated price which would be received for the sale of an asset or transfer of a liability on the open market. People determine exit values for accounting purposes and these values may be used in a variety of ways. Exit values are distinct from entry values, which reflect the price which would be paid to acquire something. Several different methods can be used to think about exit value. People can look at the present value of the asset, the current selling price, or the net realizable value.
Because times are not always favorable for sales, one important thing to consider is what the current market conditions are. If the market is poor an exit value may be low because it is determined by acting as though something needs to be sold immediately and thus a strategic wait for a better price is not possible. Exit values can be used in the assessment of a business by a valuator, a determination of a fair asking price, and a number of other settings.
When calculating exit value, third-party evaluators are often used to avoid bias. The person who owns the asset or liability under consideration may be inclined to overvalue it or otherwise fail to estimate the value properly, while someone who has no interest in the value can make a more neutral estimate.