Fair Value or Historic Cost?

Over the past few years, this question has been increasingly asked and pondered over. It is constantly debated whether historic cost actually provides the investor with the information required to make good decisions. There are strong views in favour of fair value measurement, proposing that it is a more current view on an asset's or liability's true value on the current transaction date. The fair value of an asset is the amount at which an asset can be purchased or sold between willing parties in a current transaction. The fair value of a liability is the amount at which a liability can be settled between willing parties in a current transaction. Fair value excludes any forced sales or settlements and does not include liquidations.

Is the historic cost of an asset/liability any indication of the value at which it can be sold/settled in the future?

In today's market, it is hard not to agree that an asset's historic cost is no longer relevant.

Janine Pakiry
Asst. Vice President
(Financial Control)
Lehman Brothers

Should Ranbaxy promoters have sold out?

Ranbaxy has been an example of the rise of an Indian MNC.

After many years of acquiring some big companies globally, it was a role reversal to see the promoters of Ranbaxy deciding to sell their controlling stake of 34.8% for Rs10,000 crores at Rs 737 per share ( 31.4% premium over the company’s closing share price on the same day).

If the Daiichi Sankyo’s acquisition of Ranbaxy leads to a stronger company in this globalised era, and can also retain its name and country of origin then it may give a fillip to the rise of Indian MNC. However, if it becomes Daiichi India, with no trace of Ranbaxy then it may become one less Indian MNC.

The company reported an operating income of more than Rs 4000 crores and a net worth of more than Rs 2000 crores for FY 2008. The company also commanded respect in our stock market enjoying a P/E ratio of 34. It has a total debt-equity ratio of 1.4 and long term debt-equity ratio of 0.9. This gave it scope to raise resources both from the equity market as well as the bond market.

The promoters may have very good reasons for selling their controlling stake, but overall I feel a little sad that Ranbaxy promoters sold the controlling stake.

Prof J N Mukhpopadhyaya

(Globsyn Business School)

Should Human Assets Be Included in the Balance Sheet of a Company ?

Though your Balance Sheet is a model of
What balances should be,
Typed and ruled with great precision,
In a type that can see ;
Though the grouping of the assets
Is commendable and clear,
And the details which are given more
Than usually appear,
Though investments have been valued
At the sale price of the day,
And the Auditors Certificate shows
Everything O.K.
One asset is omitted and its worth
I want to know,
The asset is the value of the Men
Who run the show.

Author: Sir Mathew Webster Jenkinson

Contributed By:
Prof. Jayanta Mitra
(Globsyn Business School)