TeachMeFinance.com - explain net realizable value
net realizable value -- a method of determining the present value of a troubled asset to its present owner based on the assumption that the asset will be held for a period of time and sold at some future date. The present value includes future earnings the asset is expected to generate, less the cost of owning, holding, developing and operating the asset. To compensate for these costs, the asset's projected future net cash flows are discounted using a formula that incorporates the cost of capital (the cost of paying dividends and interest). Net realizable value, therefore, is based on a formula incorporating what the asset must earn in order to pay for its share of the costs of running the business. Net realizable value is one accounting method used to calculate the present value of an asset (a loan) at some point after the loan has become past due and book value is no longer valid. See fair value.
fair value -- a method of determining what a troubled asset would be worth (its present value) if its present owner sold it in the current market. Fair value assumes a reasonable marketing period, a willing buyer and a willing seller. It assumes that the current selling price (its present value) would rise or fall in relation to the asset's future earnings potential. To calculate that price, fair value converts the asset's future earnings into what they are worth in today's dollars, using a formula that discounts the assets' future net cash flows. The discount is based on the fact that a dollar earned in the future is equal to, say, $.75 invested today plus interest over an equivalent period of time. Thus, a dollar received today and invested is worth more than a dollar received in the future. Fair value, therefore is based on a formula incorporating rates of interest earned. While market value measures the sales price agreed to by the buyer and seller, OTS defines fair value as measuring the value of what the seller would receive less selling costs. Fair value is one accounting method used to calculate the present value of an asset (a loan) at some point after the loan has become past due and book value is no longer valid. See net realizable value.
About the author
Copyright © 2005 by Mark McCracken, All Rights Reserved. TeachMeFinance.com is an informational website, and should not be used as a substitute for professional financial or legal advice. TeachMeFinance.com and its owner recommend consultation with a professional financial advisor prior to any investment or financial decision. Please read our disclaimer.