The Wealth Of Nations - An Approach Based On The International Valuation Standards

• Author: Bogdan-Radu Herzog
• Pages: 29-35

THE WEALTH OF NATIONS – AN APPROACH BASED ON THE

INTERNATIONAL VALUATION STANDARDS

PhD. student Bogdan-Radu HERZOG1

Abstract

The paper proposes a new approach to the valuation of the efficiency of a national economy by using the

corrected net asset method (ANC) recommended by the international valuation standards. The author starts b y noticing

that the main statistical indicator cu rrently used for assessing a country's economic status, namely gross domestic

product (GDP), is an indicator of the value o f the produced output, without really reflecting the patrimonial status of

the subject. Unlike states, companies are required by law to present two basic documents: a balance sheet, with assets

and liabilities, and a profit and loss account, which reflects the revenues and expenditures generated. Should a balance

sheet-type document be presented by the state, reflecting both assets and liabilities, a corrected net asset value (ANC)

could be calculated. The evolution of a national economy could be traced b y following this indicator over a period of

time (ANCn - ANCn-1). As a consequence, when a ssessing, for example, the evolution of the national economy, we will

compare not only GDP2018 with GDP1989, but also the evolution of the net asset position of the Romanian sta te over the

same period, i.e. ANC2018 with ANC1989.

Keywords: valuations of national economies, net asset value, Gross Domestic Product, asset based valuations,

national assets.

JEL Classification: H83, H87, K23, K33

1. Introduction

Financial Statements. The international financial reporting standards (IFRS) set a very rigid

frame for the way that economic agents present their financial statements. These entities, private or

state owned corporations, banks, investment funds etc. are bound by law to present annual financial

statements in a standardized synthetic nature, and if they reach a certain dimension, to audit them

by chartered specialist.

The main financial statements presented by economic agents are the balance sheet and the

profit and loss account. Without citing the IFRS definitions we will synthetically state that the

balance presents the situation of the companies’ assets and liabilities in a certain year (let’s say year

n, be it 2018) in comparison with the situation of the previous year (n-1). By comparing the two

moments, n and n-1, a conclusion can be reached regarding the evolution of the assets value (land,

buildings, industrial equipment, financial assets etc.). A similar conclusion can be reached by

observing the evolution of the liabilities.

Unlike the balance sheet, which captures the assets and liabilities of a company at a given

point in time (that is, it has a static character), the profit and loss account seeks to identify the

economic activity generated over the same period of time. In general terms, the profit and loss

account shows the income and expenses incurred by the economic agent, i.e. the economic activity

generated using the patrimony photographed through the balance sheet. Therefore, we can say that

the financial statement identified in the profit and loss account has dynamic nature. The difference

between the philosophy and the goals of the two types of financial statements can be conceptualized

by imagining a trading company with significant, unused, preserved assets. This firm would present

significant amounts in the balance sheet but would have an insignificant impact on the profit and

loss account.

Approaches to business valuations. According to international valuation standards (GEV

600 - Enterprise Evaluation), business valuation is based on the two types of financial statements

presented. ANEVAR assessment standards taking on GEV 600 recommendations indicate "The

value must attach particular importance to the financial statements of the enterprise subject to the

valuation. There are three purposes of financial analysis and financial statement adjustments:

1 Bogdan-Radu Herzog - School of Advanced Studies of the Romanian Academy, bogdan.herzog@abaconsulting.ro.