Cost is one of the key characteristics of the subject of a civil law transaction. What are its symptoms? How are values classified? For what purpose in business or in real estate business are the relevant indicators calculated and by what methods?
What is cost and valuation
Before studying the types of value and the accompanying grounds for its classification, we will determine what it represents. There are a lot of criteria that would allow her to give an unambiguous description among the world and Russian economists. Among the most popular are: cost is the amount of money that is set as a condition of a transaction in the process of interaction between subjects of civil law relations at the estimated time of transfer of property rights or other mechanisms for using the object. In turn, the concept of “valuation” is associated with a mechanism for determining the amount in question.
Aspects of Evaluation
The objects of evaluation can be real estate, services, transport, household items, intellectual property - everything that is provided for by civil law as a possible subject for transactions involving individuals and legal entities. The procedure associated with determining the monetary value, the transfer of which from one subject of legal relations to another is the basis for the transfer of property rights, is carried out by methods recognized by both parties. They can also be offered by third parties, but subject to agreement with the main participants in the transaction.
These or other types of value of goods, property or services may be determined, depending on the nature of the legal relationship, at the request of the parties or by virtue of the requirements of the law. So, for example, in real estate transactions, the use of the services of appraisers is in many cases mandatory for registering property rights.
Assessment Approaches
Evaluation, as well as, for example, determining the type of value, can be carried out in the framework of various approaches. In Russian business practice, there are three main ones: profitable, comparative and costly. Let's consider their essence.
The income model involves the use of methods that are based on the calculation of the estimated revenue from the possible use of the valuation object by the new owner - for example, rental. The comparative model involves the study of figures characterizing the types of property value of some objects, with indicators of others that are very similar in terms of basic characteristics. For example, an appraiser, determining the appropriate monetary indicator for an apartment, as a rule, examines existing offers in the real estate market. In the framework of the cost model, possible costs are calculated that are necessary in terms of maintaining the object in proper functional condition. If, say, a person buys a tractor, then the evaluation expert hired by him should, when determining the cost of this type of transport, take into account the potential costs associated with the repair of equipment.
Cost result
As soon as the types of property value are analyzed and the corresponding assessment is given, its result can be used as a guideline for determining the final price of the transaction. Or for other purposes - for example, when concluding an insurance contract, granting a loan, selling a share, etc. Let us consider what types of value are distinguished in the assessment of various objects by Russian experts. And also how relevant information can be used in practice.
Cost classification
What types of value of this or that assessment object are distinguished by modern experts? There are a lot of classification criteria. Consider one of the models common among Russian economists.
It contains, in particular, market value. This is the price, the value of which is fixed at the time of valuation of the object, provided that it is supposed to be sold in a competitive segment. That is, the prerequisites for determining the correct value are the availability of public information about the principles of pricing of the goods, the absence of significant external (regulatory) factors affecting the price.
There is an investment value in the model under consideration. Its indicators are identified in order to provide information to persons interested in investing in a certain object. In some cases, the investment value may coincide with the market value. But it's not always the case. Sometimes, at the same time as the investment, the residual value of the object is also calculated. Its value expresses the probable amount of possible revenue upon the fact of resale of the subject of the transaction.
There is a cadastral value. The purpose of its establishment is to record the object in a certain state or industry register with subsequent use of information by the relevant statements. As a rule, in this case we are talking about calculating taxes. The cadastral value is usually lower than market, if we talk about real estate, or approximately equal to it.
There is also such a thing as insurance value. It involves calculating the amount of payments under an insurance contract. In some cases, the replacement cost of an object is also calculated simultaneously with it. This happens, for example, if the corresponding agreement with the insurance company does not imply monetary compensation, but the bringing of the object to its original functional state upon damage or failure.
Thus, we examined the 4 types of value that are most common in the Russian economic school, as well as several complementary to them. This list, of course, is not exhaustive. There are private types of market value, as well as investment, or cadastral, concerning the characteristics of objects with different, as an option, legal status. Now we turn to the study of the essence of objects for which the corresponding parameter is calculated in the aspect of practical significance.
Business Valuation
Of course, there are a lot of specific types of objects in relation to which value is determined. Among the most frequently encountered in Russian business practice are business and real estate. In the first case, the totality of firms' assets, management principles, and profit-generating activities are evaluated. Before studying the types of value of the enterprise, it will be useful to determine the goals that confront the subject of the corresponding assessment.
Why determine the cost parameters for a business? The first option here is the prospects for selling the enterprise. The owner of the company may decide to do another thing, but before it is beneficial to transfer the current into the hands of another owner. Also, a business assessment can be made to improve the quality of company management, identify possible shortcomings in the management system. Another option is to attract the attention of investors if there is not enough working capital, or the company has set the task to expand the market, as a result of which there is a need for additional funds. Business valuation can be carried out when applying for a loan - it is it, as a rule, that serves as a guideline for making decisions on granting a loan by a bank.
Business Valuation Values
What types of value are involved in the valuation of enterprises? What principles are most often used here? The main types of value that are applicable to business valuation are market and investment. According to some experts, considering the possibility of buying an enterprise, it is advisable for a partner to focus on the second direction in the analysis of relevant prospects. Since a typical “market” price for a business is an indicator that does not always speak clearly about the development potential of an enterprise. But if we are talking about identifying it precisely, then the key principles of calculating the necessary numbers can be based:
- by comparing the available indicators with those that are characteristic of other market participants;
- the study of the competitive advantages of the business;
- on the subjective vision of the experts making the assessment;
- the study of the influence of external factors.
If we are talking about determining the investment value of a business, then the same principles can be applied, but in addition to them it is also permissible to use a number of others:
- modeling the behavior of entities involved in the business (influence of factors);
- calculation of profitability (increase in market value over time).
Specific indicators of value can satisfy a potential buyer of a business or investor, depending on what is the estimated size of investments in the business and what are the prospects for their return on investment. In many cases, the investment may be of credit origin. The value of the possible profit should not only be different from zero, but also ensure the payment of interest to the bank. Additional guidelines in investor decision making, not counting indicators that reflect the market and investment value of a business, may include:
- the estimated sustainability of the business (the ability to generate income over a long time);
- correlation of payback periods with competitive businesses (maybe it is more profitable for an investor to invest in another company, and for the buyer to acquire it);
- level of trust between partners.
These criteria can be very subjective. Therefore, in business practice, the market and investment value of a business are important parameters, but not always key ones.
Another possible factor is the cost of the types of work associated with evaluating the business for investment or a possible purchase. If the study of the enterprise can be accompanied by significant investments that do not imply real profit (for example, contacting external experts, auditors and analysts), then it is likely that the investor or potential buyer of the business would prefer not to deal with a particular company.
Property valuation
It will be useful to study what types of property value are, as well as what approaches are being implemented in assessing it. But before - as in the case of business - we define the goals that are pursued by participants in civil transactions of the corresponding type. The need to study the types of property value, as well as turn to the services of an appraiser, arise in the following main cases:
- there is a transaction of sale of an apartment, office, other building or premises;
- valued assets of the company;
- the size of the tax base is determined in terms of property taxes.
Of course, in practice there can be more reasons for real estate valuation. For example, in some cases it becomes necessary to determine the types of estimated cost in addition to the basic procedures. Or - as an option - to evaluate real estate with a view to its transfer for state needs.
Property Valuation Values
We noted above that the main types of enterprise value are market and investment. With regard to real estate, the same parameters can be investigated, but as a rule, in addition there are a number of others. Namely, the cadastral and insurance value of the object. In some cases, liquidation is also determined. We have already considered the features of determining market and investment value above. In the case of real estate, the general principles and methods in their form are generally similar to those used in evaluating a business. They are only involved when they are more adapted to the specifics of the corresponding market: “competition” is replaced by “condition” (level of repair, finishing materials and its quality, etc.), “profitability” - by the expected “rise in price”.
Let us now examine how the calculation of figures for cadastral, insurance and liquidation values is carried out. All of them have some specifics. Each type of determined value from the listed is characterized by features in the aspect of valuation methods. Consider them.
When it comes to the cadastral value of real estate, the appraiser takes as a basis the methodologies reflected in relevant legislative sources, recommendations of the Ministry of Finance and other departments responsible for the practical use of relevant information about housing. In some cases, criteria specific to determining the market value of an object may also be used. Various technical documentation can be studied.
If the task is to determine the insured value of real estate, then in this case, as a rule, the appraiser is guided mainly by market methods, but adjusted for the actual content of the purchase and sale transaction. For example, if a person buys an apartment on a mortgage, then only the loan amount can be included in the insurance value. And in this case, the appropriate basis for calculating the amount under the contract with insurers may be lower than if the market value of the apartment were taken in its pure form.
A mortgage is an example of a market segment where the residual value of an object may be practically significant for subjects of civil law transactions. If, for example, an individual or organization is unable to fulfill the conditions for paying a loan, the bank will probably decide to sell the property that is pledged. Even before signing a loan transaction, a financial institution will probably want to analyze the prospects for the liquidation component of the project.
We note, however, that some experts consider it unlawful to use the term "residual value" in relation to real estate transactions when interacting with banks. The fact is that, by default, a mortgage agreement does not imply a mandatory transfer of the apartment into the ownership of the bank - it is only a security measure for a loan. While in its pure form, liquidation value implies calculating the price at which the owner of an object (for example, a business) will be able to sell his property (say, due to the bankruptcy of the enterprise). Therefore, use the term in question in relation to real estate should be used with caution.
