Exit Value Accounting

Exit value accounting is a form of current cost accounting which is based on valuing assets at their net selling prices (exit prices) at the balance sheet date and on the basis of orderly sales. An exit value is the maximum price a currently held asset could be sold for in the market less the transactions costs of the sale (the net realizable value for the asset). This normative accounting theory was developed by Raymond Chambers and labeled as Continuously Contemporary Accounting (CoCoA). The theory relies on assessments of the exit or selling price of an entity’s liabilities and assets.

The exit value accounting theory was developed under the following key assumptions. Firstly, firms exist to increase the owners’ wealth. Secondly, the organization’s ability to adapt to changing circumstances is the basis of successful operations and Finally, the capacity to adapt will be best reflected by the monetary value of the organization’s assets, liabilities and equities at balance date, where the monetary value is based on the current exit or selling prices of the organization’s resources.

All assets in the exit-price accounting should be recorded at their current cash equivalents which represented by the amounts expected to be generated by selling the assets and an orderly sale determine the net-sales or exit-prices. Depreciation costs would not be realized within exit-price accounting as the model is based on the current cash equivalents.

Liabilities would be similarly valued at the amounts it would take to pay them off as of the statement date. The income statement for the period would be equal to the change in the net realizable value of the firm’s net assets occurring during the period, excluding the effect of capital transactions. Expenses for such elements as depreciation represent the decline in net-realizable value of fixed assets during the period.

The  exit value accounting model is based on immediate sale, which seems under the control of the entity although some estimation of the future may be included. As a result, the asset does not contribute to an entity’s capacity to adapt to changing circumstances if it is not ready to sell (as it does not have a sales price). In addition, the profit for a certain time should also be related the alteration of the current exit-prices of the assets and hence, profit should reflect changes in an organization’s capacity to adapt.

The benefit of  exit value accounting system is the relevance of the information it provides. With this approach, the balance sheet becomes a huge statement of the net liquidity available to the enterprise in the ordinary course of operations. It thus portrays the firm’s adaptability, or the ability to shift its presently existing resources into new opportunities.

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