On Friday, congressional conference committee members announced that they had reached agreement on the final contours of the financial overhaul bill. The bill is expected to be put to a final vote in the next week and perhaps be ready to be signed into law by July 4. Knowing the speed with which Congress completes tasks, I will not hold my breath, but it is time to examine what's in the bill and whether it will accomplish its stated objective: to put financial services firms (and especially banks) on a firmer footing and to prevent another banking crisis.The bill is almost 2000 pages long, which...
Valuation Approaches...
I have always believed that valuation is simple at its core and that we choose to make it complex. Furthermore, the determinants of value have not changed through the ages; all that has changed are the estimation practices. One of my pet peeves relating to valuation is when an entity (usually a consultant, academic or an appraiser) takes a standard valuation equation, does some algebra, moves terms around and then claims to have discovered a new and "better" valuation model.Each consulting firm has its own proprietary value measure, with a fancy name and acronym (Economic value added (EVA), Cash...
What is "fair value"?
What is the fair value of an asset? Sounds like a simple question but the question has taken on a life of its own, given recent changes in both accounting and legal standards. In both contexts, the rule makers contend that their objective is to ensure that assets are recorded at fair value and have created rules to ensure that this happens.Let us start with accounting. The push towards fair value accounting has now become an article of faith for accounting standards boards. In the United States, FAS 157 (the very fact that we are at rule number 157 tells you something about how accountants think...
Parent versus Consolidated financial statements
My last post on valuing the Tata companies, all of which have significant holdings in other companies, has raised a natural follow up question. When valuing a company, is it better to use stand-alone parent company financial statements or should we use consolidated financial statements? More generally, which of these two should you focus on as an investor/manager/regulator?Accounting BackgroundThe question of whether to use parent-company or consolidated statements becomes an issue only when a company has cross holdings in other companies. To illustrate the difference, consider a simple...
