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Is the CAPM a proper method to be used in the process of computing the value in use? The estimation period effect (using monthly returns)
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Abstract(s)
In the impairment process, IAS 36 establishes that the asset (or group of assets) recoverable amount is the highest from the fair value less costs to sell and the value in use. To compute the value in use amount, IAS 36 determines the use of present value technique and establishes guidelines for it, namely for cash flows estimation and the discount rate calculation. The last IAS 36 update is strongly based on the FASB SFAC 7. If we compare the guidelines regarding the use of the present value technique, we will find the text very similar. However, regarding the guidelines of the discount rate to be used in the process of computing the present value, a particular difference can be seen, SFAC 7 determines that the Capital Assets Pricing Model (CAPM) is, in general, not a proper method to be used to compute a discount rate.
On the contrary, IASB, and despite the IAS 36 update, kept the use of CAPM as a good solution as a starting point to compute a proper discount rate. CAPM results depend on how the beta element is
computed. Bloomberg, Value Line, Baseline and Ibbotson are among those companies, which provide betas based on the CAPM or its enhanced versions. The most important differences in computing betas arise from the type of returns used (daily or monthly), the index used as a proxy for the market portfolio and the estimate period (5 years, 2 years or 1 year). In this paper, applying CAPM (using monthly returns and the index S&P 500 as a proxy for the market portfolio) to a dotcom sample and considering an acceptable materiality level, we analyse the effect of the estimate period on the results (i.e. the discount rate) provided by the model. The results show high discount rates variations (according to the estimation period used), and consequently material variations in the “value in use” indicating that they are not reliable to be used for reliable accounting measurements.
Description
Keywords
CAPM IAS 36 SFAC 7 Discount rate Materiality
Citation
Lopes, José; Pereda, Jorge Tua (2007). Is the CAPM a proper method to be used in the process of computing the value in use? The estimation period effect (using monthly returns). In 30th Annual Congress of the European Accounting Association. Lisboa
Publisher
European Accounting Association