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September 01, 2008

Green Asset Valuation

Introduction

Four characteristics must be met for a resource to be recognized as an asset. the resource must, singly or in combination with other resources, contribute directly or indirectly to future net cash inflows; the enterprise must be able to obtain the benefit from the resource and control the access of others to it; the transaction or event giving rise to the enterprise’s claim to or control of the benefit must already have occurred; and the future benefit must be quantifiable or measurable in units of money. The assets are broken down into further, more specific categories by order of decreasing liquidity. Current assets is used to designate cash and other assets or resources commonly identified as those that are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business (Riahi-Belkaoui 1998).

 

Current assets consist generally of cash, marketable securities held as short-term investments, accounts and notes receivables net of allowance for uncollectible accounts, inventories of merchandise, raw materials, supplies, work in process and finished goods, and prepared operating costs. An investment is used to designate the investments in securities of other firms to be held for a long term and whose financial statements have not been consolidated with the parent or investor firm (Riahi-Belkaoui 1998). Long-term investment of 50 percent of the voting stock of a corporation calls for consolidation of the financial statements of the subsidiary with the parent firm. Property, plant, and equipment designates the long-lived assets, generally termed fixed assets, acquired for long-term use rather than resale, and generally include land, buildings, machinery, and various equipment. With the exception of land, these assets are carried at original cost less accumulated depreciation. Intangible assets designates resources that lack physical existence and includes copyrights, patents, trademarks, goodwill, organization costs, franchises, lease holds, and similar item (Riahi-Belkaoui 1998).

 

Assets can be a difficult category to grasp because it includes different kinds of things. The cash a company has in the bank is an asset. So is the computer on the receptionist's desktop and the inventory in the warehouse. If customers owe the company money, the amount they owe is considered an asset. Assets are the things the company has and uses in its business that have value extending into the future. The assets side of the balance sheet shows what a business owns. All of the other assets on the balance sheet have a defined value. Someone who buys a company is usually buying much more than just the assets recorded on the seller's balance sheet (Case, Kremer & Rizzuto 2000).

 

 The buyer gets an ongoing business. The company has a customer list, business relationships, a reputation, a place in the community. The price of the business will be determined not just by the value of the seller's assets but by the company's market value, which depends on these intangibles and many other factors that do not appear on the seller's balance sheet. What a buyer pays for a business is often more sometimes much more than the dollar value of the assets on the seller's balance sheet. That extra that the buyer pays is what accountants call goodwill. It appears on the balance sheet just like any other asset, and it will be amortized over time much like any depreciable asset. It's the most common form of what are known as intangible assets something that has value but can't be touched, collected, or spent (Case, Kremer & Rizzuto 2000).  The paper will discuss about Asset Valuation and how the company chosen values its non current assets. The paper will discuss about the company that values its non current assets.

 

The company HSBC

HSBC Holdings is a British financial holding company with origins in Hong Kong and Shanghai, where offices were opened in 1865 under a special charter which allowed Hong Kong rather than London as a headquarter location. The bank remained an eastern force until the 1950s, when overexposure to the crown colony and its textile industry pointed to a need for geographical diversification. A worldwide scan was made with rather disappointing results. Australia and Canada were protectionistic and so was the Continent, in addition to being over-regulated and well served by its own talent. Central West Africa was saturated by British banks and, after independence; the new countries gave priority to domestic banks. Only the USA was attractive because it offered dollar assets in a dollar-hungry world (Laulajainen 2003). But before anything could be done about it, events elsewhere called attention. HSBC was in intense competition all over Asia with Chase Manhattan which showed interest in a small bank in India and Malaysia. HSBC pre-empted by purchasing the bank in 1959. In the same year another defensive acquisition became necessary, when an investor group tried to buy the British Bank of the Middle East, strip its assets and sell the branches to HSBC, which did the bulk of its Middle East business through the bank (Laulajainen 2003).

 

 For example, Kuwaiti authorities kept half of their money there. With the purchase came a chain of retail branches in Cyprus. A few years later a banking crisis erupted in Hong Kong. HSBC was not seriously affected but Hang Seng Bank, the colony's second largest, was about to flounder in a run. Chase offered help but Hang Seng preferred HSBC, because of its local roots, and sold it a majority stake in 1965. These three deals illuminate the difference between corporate strategy and the realities of the marketplace (King 1991).Diversification had taken a beating although it was only in 2000 when acquisitions in Asia became topical again, in a small way. Two of them were part of the private banking drive, PCIB Savings Bank in the Manila area and Taiwan's leading asset manager China Securities Investment Trust Corp. in 2001, to be followed by an 8 per cent stake in the Bank of Shanghai (Laulajainen 2003).

 

HSBC had returned to its roots. Afterwards many more events unfolded including the turnover of Hong Kong to china this prompted HSBC to transfer headquarters to United Kingdom (Laulajainen 2003).HSBC sees the Internet as one of several exciting new media, to be incorporated as an integral part of its working. The bank has concluded that e-commerce will change the fabric of the financial services sector and sees it as a way of finding new customers all over the world and improving its services to existing customers. It intends to use e-commerce to reorganize the business so as to provide higher-quality customer services more efficiently. HSBC will be able to link its customers to the full range of international services and manage their processing wherever it chooses, which the bank sees as a considerable competitive advantage(Tansey 2002). HSBC has adopted a clicks and mortar strategy. This requires that customer Internet offerings must meet three criteria: customer needs and preferences come first; they must fit HSBC’s existing distribution channels; and they must be multinational in scope. Recently the group has been reorganizing its work for the e-age and putting in place some major components of such a strategy. In 2000, over US$2 billion was spent on technology, including a significant proportion on dot.com initiatives. HSBC aspires to be one of the first to provide customers with facilities through the Internet on a multi-geographical and multi-product, basis (Tansey 2002). HSBC is one of the most successful financial institutions in the world. HSBC caters to different financial needs of the people and the company provides service through the internet and regular methods of banking.

 

Asset Valuation

The world of asset valuation becomes considerably more complex when businesses turn to intellectual property in general and technology assets in particular. Here they have assets that do not exist in tangible form, but rather as concepts or knowledge that can be applied or used to produce a beneficial result. There is general agreement that these assets have value, but quantification of that value can be, to say the least, a challenge. Combine this very general characteristic, then, with the further problem of evaluating a new and as yet un-commercialized technology, and one can appreciate the difficulty of developing a realistic value for technological assets such as a new manufacturing process or an improved control scheme. In many cases, and not just in small business entrepreneurial situations, the response to the problem of placing a value on technological assets is, in effect, to ignore it (Watkins 1998). 

 

Try to establish the value of fixed and tangible assets owned and managed by a business, and the property books and associated balance sheet data can be used to develop the desired information. Ask for the same information on intangible technological assets a few may have something of this nature, but the vast majority will fall far short of a comprehensive technological asset inventory and valuation. The argument is sometimes made that there is really no pressing need to place a value on the intangible assets of an enterprise. There are certain situations wherein a definitive value for a technological asset is needed.  In view of the fact that in many small entrepreneurial enterprises the technology thus acquired is literally the crown jewels of the total business strategy, it is probably not stretching a point to say that valuation can be a critical issue. The same reasoning can be applied to the valuation of a technological asset that is being considered for divestiture or licensing out (Watkins 1998).

The process of valuation requires a choice of an attribute to be measured and a unit of measure. The attributes of assets and liabilities refer to what is being measured and include the Historical cost, which refers to the amount of cash or cash-equivalent paid to acquire an asset, or the amount of cash-equivalent liability. It also includes the Replacement cost, which refers to the amount of cash or cash-equivalent that would be paid to acquire an equivalent or the same asset currently, or that would be received to incur the same liability currently. Moreover it includes the net realizable value, which refers to the amount of cash or cash-equivalent that would be obtained by selling the asset currently, or that would be paid to redeem the liability currently. Last is the present or capitalized value, which refers to the present value of net cash flows, expected to be received from the use of the asset, or the net outflows expected to be disbursed to redeem the liability.  Two units of measure are used in financial accounting: units of money or units of general purchasing power (Riahi-Belkaoui 1992).  

 

Combining the four attributes and the two units of measures yields the following are the alternative asset valuation and income determination models. The first is Historical cost accounting, it measures historical cost in units of money.  Replacement cost accounting measures replacement cost in units of money.  Net realizable value accounting measures net realizable value in units of money.  Present value accounting measures present value in units of money.  General price-level accounting measures historical cost in units of purchasing power.  General price-level replacement cost measures replacement cost in units of purchasing power.  General price-level net realizable value accounting measures net realizable value in units of purchasing power.  General price-level present value accounting measures present value in units of purchasing power (Riahi-Belkaoui 1992).  Asset valuation helps in determining the worth and importance of the Assets the company has. This also helps in determining whether the company has a good standing or not.

 

Asset valuation and HSBC

Banks make money many different ways. Some banks employ traditional banking strategies, attracting household deposits in exchange for interest payments and transaction services and earning a profit by lending those funds to business customers at higher interest rates. Other banks employ nontraditional strategies, such as credit card banks or mortgage banks that offer few depositor services, sell off most of their loans soon after making them, and earn profits from the fees they charge for originating, securitizing, and servicing these loans. In between these two extremes lies a continuum of traditional and nontraditional approaches to banking focusing on local markets or serving customers nationwide; catering to household customers or business clients; using a brick-and-mortar delivery system or an internet delivery system; and so on (Deyoung & Rice 2004). Over the past few years, U.S. commercial banking has been transformed from a heavily regulated industry, in which banks were prohibited from competing with each other, to a largely deregulated industry, in which commercial banks compete vigorously among themselves, as well as with investment banks, securities firms, and insurance companies. This historic industry deregulation, in conjunction with dramatic advances in banking technology, laid the groundwork for new business strategies at commercial banks. Deregulation has transformed almost every facet of the banking industry. It has been pro-competitive by allowing banks to expand into neighboring cities and states, to offer financial products and services that had previously been reserved for non-bank financial institutions, and to set deposit interest rates according to market forces. Deregulation has been pro-efficiency: It encouraged scale economies by allowing banks to grow larger; cost and revenue synergies by allowing banks to broaden their product lines; and operational efficiencies by exposing banks to increased market competition. And deregulation has been pro technology by allowing banking companies to attain the large size necessary to fully benefit from declining cost technologies such as credit scoring and asset securitization, to launch mass-market advertising, and to better reduce risk via diversification (Deyoung & Rice 2004).

 

A quarterly accounting-based returns exhibit considerably less variation over time and as a result, substantially higher risk-adjusted profits than the weekly stock market returns. This difference is likely due to three factors: accounting conventions that affect the valuation of assets and the way that expenditures are recognized over time; changes in relevant information and investor expectations that are priced by the stock market but not included in backward-looking accounting statements; and the different frequencies over which company's observe the accounting data and the market data. The accounting-based returns are substantially lower on average than the stock market-based returns. The most likely explanation is that publicly traded companies with low returns are likely to become takeover targets and drop out of THE sample, while closely held private companies with low returns are more likely to continue to operate independently (Deyoung & Rice 2004).  The company makes use of asset valuation through financial statement analysis, ratio analysis, fundamental analysis and valuation economics. The company makes use of these tools to know whether the assets they posses still have value. The value of the assets helps the company in determining whether the company has the capacity and capability to attain important assets.

 

Conclusion

Assets are the things the company has and uses in its business that have value extending into the future. The assets side of the balance sheet shows what a business owns. All of the other assets on the balance sheet have a defined value. Companies use valuation to make sure that they have ideas of the worth and importance of the Assets the company has. HSBC uses asset valuation through the different tools available. HSBC studies the result of financial statement analysis, ratio analysis, fundamental analysis and valuation economics to know the standings and worth of their assets. Through the asset valuation the company gets to target assets that have the best value.

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