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Valuation Measuring and managing the value ofpanies - Koller T.

Koller T., Murrin J. Valuation Measuring and managing the value ofpanies - Wiley & sons , 2000. - 508 p.
ISBN 0-471-36190-9
Download (direct link): valuationmeasuringandmanaging2000.pdf
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As in the case of goodwill, ROIC should be calculated both with and without revaluation. ROIC including revaluation measures the operating performance of the company irrespective of when the assets have been bought and is useful for comparing operating performance across companies. ROIC excluding revaluation measures how well the company has employed its investors' funds. It shows whether the company has earned its cost of capital, taking into consideration the actual cost paid for fixed assets.
Exhibit 18.6 Fixed Asset Revaluation

Country Is it allowed? Which criteria are used? Is revaluation tax free? Is depreciation tax deductible?
Belgium Only if the value has clearly and permanently risen. Usually done only with respect to real estate assets Market prices, as estimated by authorized experts No: revaluation reserves are taxable at the corporate tax rate. They are accounted for as "exceptional profits' Yes
Denmark Finland Yes Yes, if there is permanent increase in value Market value No Yes
France Germany Yes, since 1984, under certain conditions No Market value No Yes
Italy Only according to government decree (most recent in 1983, 1990, and 1991) Using government price indices 1991 revaluation was subject to a 16% tax Yes
Japan No, except that land can be revalued if special permission granted by government (March 31,1998 to March 31, 2001) Market value Yes Not applicable
Netherlands Yes, every year Replacement cost or market value Yes No
Portugal Only according to government decree (usually every two years) Using government price indices Yes Yes, partially (60% of additional depreciation)
Spain Only according to government decree (most recent in 1983) Using government price indices Yes Yes
Sweden Switzerland Yes, if there is permanent increase in value No Market value Yes Yes
United Kingdom United States Occasionally (land and buildings) No Market value Yes Partially, according to tax rules
IAS Yes Source: McKinsey research; information trom 1998. Up-to-date fair value Not applicable Not applicable
Page 360
The most appropriate way to take revaluation into account is to annually adjust NOPLAT and invested capital to reflect the annual increase of market values. In countries where revaluation is done over longer periods, the revaluation reserve should be spread over the period in question. In any case, when calculating free cash flow, capital spending should be determined as the increase in net fixed assets plus depreciation, less the increase in the revaluation reserve. Otherwise, investments would be overstated.
Deferred Taxation
Deferred taxes arise from differences between a company's published financial statements and its tax accounts. In Germany, Switzerland, and Italy, deferred taxes normally do not arise in the accounts of individual companies because financial statements are the same as tax accounts. However, deferred taxes may arise in consolidated accounts. In other countries, deferred taxes could be substantial because of items such as asset revaluation and accelerated depreciation.
To calculate NOPLAT, invested capital, and ROIC, income taxes should be stated on a cash basis. For NOPLAT, the increase in deferred taxes (as a balance sheet item) should be subtracted from the amount of taxes on the income statement to calculate taxes on earnings before interest and taxes (EBIT). For invested capital, deferred taxes should be treated as an equity item as described in Chapter 9.
Consolidation
As summarized in Exhibit 18.7, most countries require consolidation of accounts when a subsidiary is more than 50 percent owned, or when there is a controlling interest. In some cases, these consolidation principles were adopted only recently; consequently, historical accounts may not be entirely comparable. The footnotes to a company's accounts should be reviewed to ensure comparability across companies and time.
Foreign Currency Translation
The translation of the accounts for foreign subsidiaries into the parent company's currency for consolidation purposes follows either the current or temporal method.
The current method translates foreign-currency balance sheet items into the parent currency at the end-of-period exchange rate, except for equity accounts. Equity is converted at historical rates, for example, at the exchange rate on the day of a share issue. The income statement is translated at an average rate for the period. An equity account called translation adjustment is credited or debited with the amount necessary to balance the balance sheet.
Page 361
Exhibit 18.7 Consolidation
Country When do subsidiaries have
to be consolidated?
Belgium When ownership exceeds 50%
Denmark When voting rights exceed 50%
Finland When ownership exceeds 50% or
controlling interest France When ownership exceeds 50%, or 40% for
two consecutive years, or one parent designated more than half of the directors, or parent has a control on subsidiary through special contracts or clauses Germany When ownership exceeds 50% or the
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