The asset value is reduced by the amount of the current liabilities, on the basis that these (predominantly trade payables) are provided free of interest.
historic cost, less accumulated depreciation), inventories are shown at market value, and also added are the provision for bad debts and the capitalised R&D costs. With regard to asset valuation, the book value of most of the assets shown on the balance sheet is used (i.e. The figure used for tax is the cash tax payment that will be made on the basis of the earnings for the year therefore any adjustment for deferred tax disappears.
These adjustments give rise to the EVA version of pre-tax operating income, from which taxes (but not interest expense) are deducted. Some generally accepted accounting principle (GAAP) treatments of expenses and assets are altered: for example R&D costs (which are commonly expensed as incurred) are capitalised and then amortised over their useful life long-term lease payments (capitalised under GAAP) revert to being expenses (with the related depreciation eliminated) and any increase in the provision for bad debts is eliminated. Notwithstanding, some of its main features are as follows: Not surprisingly, therefore, many companies see only some of these as necessary, so calculate a somewhat simplified EVA.
#RESIDUAL INCOME DEFINITION FULL#
The full application of the method calls for 160 separate accounting adjustments.
It was created as a reaction to both the lack of clarity and rigorousness of measures such as ROI ( Stewart, 1991). Economic value added is generally known as EVA® and is a registered trademark of Stern Stewart & Co.
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