Discuss other reasons for differences between the value of net assets recorded in the Financial
Statements and the value which the firm may be worth.
In 2010, the International Accounting Standards Board (IASB) removed the concept of prudence
from the so-called “Conceptual Framework”, which consists of a series of principles that have been
developed specifically to assist regulators in promoting quality financial reporting, consistency,
transparency, reliability and accuracy within the accounting field (Stickney et al., 2009, pp.764-765).
As reported by Pwc (2015), in June 2015 the IASB proposed to revise the Conceptual Framework in
such a way to re-define various accounting terms, place more emphasis on the “substance over form”
principle and reintroduce prudence as an essential constituent of neutrality. The IASB also clarified
that when measuring assets and liabilities, a mixed approach involving both historical cost (book
value) and current prices (market value) should be adopted so as to provide shareholders, debtors,
creditors and other stakeholders with relevant information (Ernst & Young, 2015).
Book value and market value are different measurement bases whose respective advantages and
disadvantages can make it difficult for accountants and investors to determine firms’ value. The book
value of an asset refers to the amount reported on a firm’s balance sheet and is equivalent to the
historical cost of the asset less any expenses associated with depreciation or impairment (Robinson
et al., 2015, p.493). Net assets refer to a firm’s total assets less its total liabilities and provide
stakeholders with essential information about the resources owned by the firm (Jackson & Fogarty,
2005). That is why net assets are commonly associated with firms’ net worth (Jackson & Fogarty,
2005). In the for-profit sector, net assets are also known as shareholders’ equity and their value
depends on the profits generated by for-profit organisations, as well as on the amount of resources
invested by their shareholders (Jackson & Fogarty, 2005). Even though non-profit organisations do
not distribute dividends, various stakeholders can benefit from their “net worth” as net assets can be
used to offer better services, support more causes and / or to expand (Jackson & Fogarty, 2005).