There are a fairly large number of financial indicators that can characterize how effective the business model of a particular commercial company is. Among these are net assets. This indicator may be of interest to the investor, partner, lender, it is also useful for managers of the company responsible for its development. How is the value of net assets in modern Russian companies calculated? What credentials can be used for this?
What are net assets?
For starters, we will examine the essence of the term in question. Net assets are a financial indicator, which is defined as the difference between all assets of the organization (LLC or JSC), which are taken into account, and liabilities, also recorded in accounting. Moreover, the determination of numbers for each component of the net asset formula is carried out, as a rule, based on the provisions of regulatory legal acts, as well as various orders and letters of government departments. But there are also formulas for calculating this indicator, defined in the scientific and expert community. But, before exploring them, it will be useful to study the structure of the company's net assets.
Net asset structure
As we noted above, the indicator in question is calculated as the difference between the actual amount of all assets and liabilities. In accordance with the prevailing point of view among Russian economists, the first should include:
- non-current assets represented by fixed assets, intangible resources, construction in progress, long-term investments;
- current assets represented by various inventories, receivables, short-term investments, VAT on acquired inventory items.
At the same time, experts recommend excluding the company’s expenses on the purchase of shares in order to sell or withdraw from the market, as well as the founders ’debts in payments to the authorized capital. In turn, in the structure of liabilities should be present:
- long-term and short-term corporate loan obligations ;
- accounts payable;
- reserves related to future expenses;
- debts to the founders on the transfer of income.
Also, the net asset formula, based on the structure under consideration, involves the inclusion in the first and second indicators of any other information that can be classified in one way or another as the resources of the company or its obligations. We noted above that various legal acts can be used as sources of a methodology that can be used to calculate the financial indicator in question. So, one of the main existing legal acts regulating the calculation of net assets is the Order of the Ministry of Finance dated 08.28.2014 № 84. Consider how to calculate net assets (the formula for their determination, in fact, is also presented in the specified legal acts) is proposed by the Ministry of Finance.
Determination of net assets by the method of the Ministry of Finance
The main financial department recommends determining the indicator in question in the following way.
First, the company needs to summarize all recorded assets and liabilities. At the same time, the data on off-balance sheet accounts, according to experts of the Ministry of Finance, should not be taken into account.
Secondly, the formula for net assets by the method of the Ministry of Finance of the Russian Federation implies the exclusion from assets of indicators such as debts of founders (shareholders, owners) of payments to the authorized capital or shares (in this sense, the position of the Ministry of Finance coincides with the approach of experts, which we examined above ), from liabilities - deferred income, which is associated with state support, as well as gratuitous receipt of any property.
Another nuance of determining the amount of net assets in accordance with the methodology under consideration is that both parameters of the formula for calculating them should be calculated on the basis of value, which is reflected in the balance sheet. Moreover, the formula for calculating net assets proposed by the Ministry of Finance is generally similar in concept to other common approaches among economists, which also involve the use of figures from the balance sheet. Let us now examine how the indicator in question can be calculated in practice.
How are net assets calculated in practice?
The formula for calculating net assets, in principle, has a very simple structure. The main thing is to have access to the numbers that are used in it. The main source of such, as we noted above, is the balance sheet of the organization. If we take the appropriate accounting document in the format in which it is approved in Russia, then information about the assets of the company is contained mainly in line 1600, and on liabilities - in lines 1400 and 1500.
Moreover, if you follow the recommendations of the Ministry of Finance of the Russian Federation and subtract from the first debts of the founders on payments in the authorized capital, from the second - deferred income, then we will also need data on accounting, reflecting the value of the first indicator (as a rule, this is the debit of account 75), as well digits on line 1530 (for the second parameter).
Thus, the net asset formula will be applied according to a certain algorithm. We will study it in detail.
Net Asset Formula: Structure and Scheme
- First of all, we subtract from the numbers on line 1600 the indicator reflecting the debts of the founders to the company for contributions to the authorized capital.
- After we summarize the performance in lines 1400 and 1500 of the balance sheet.
- Next, subtract from the result the figure on line 1530.
- The final action will be the deduction from the figure obtained by subtracting the amount of debts from 1600, the indicator obtained after the last calculation.
How can the net asset formula look schematic? Let us agree to abbreviate the indicator under consideration as ChA, line of the balance sheet - STR, accounting accounts - SC.
As a result, the formula for calculating net assets on the balance sheet will look like this:
- ChA = (STR 160 - SCH 75) - (STR 1400 + STR 1500 - STR 1530).
Having studied how the corresponding financial indicator is calculated, let us consider how it can be applied in practice.
What is the practical value of the net asset indicator?
The value of net assets is one of the key indicators of the effectiveness of the company's business model. The main criterion here is the positive or negative value of the corresponding indicator. In the first case, it is legitimate to talk about the profitability of the company, and its high investment attractiveness. In turn, if the formula for net assets on the balance sheet showed a negative result - most likely, the company has certain problems.
How to interpret the value of net assets?
Much of the interpretation of this indicator depends on the specific stage of business development. For young companies, startups, negative values are not as critical as for businesses that have been on the market for a long time. For firms that are present in highly profitable segments, a negative indicator of net assets is also acceptable, but again, it is desirable that it is not observed for long.
Such an indicator as net assets is useful to observe in dynamics over several years. Or, using the data from the current accounting, track it monthly or quarterly.
Net assets as a factor in business management
From the point of view of business management, the results of calculations of net assets are of certain importance. For example, the calculation of the net assets of an LLC (the formula for the respective companies and AO will be the same) may be useful:
- in cases where the authorized capital is increased through the property of the LLC;
- upon purchase by the company of securities from shareholders, upon the withdrawal of one of the LLC participants from the business;
- upon payment of dividends to the co-founders of the company;
- when generating reports to investors;
- when analyzing the effectiveness of the business model of a company at the request of the owner;
- as an additional source of data on the financial condition of the company when considering loan applications by the bank or in the course of interaction with potential investors.
Thus, the calculation of the indicator in question is useful both from the point of view of the organization’s reporting to interested parties, and in the aspect of the analytical work of managers aimed at optimizing business processes.
Having considered the question of how to calculate net assets on the balance sheet (the formula used for this was also studied by us), it will be useful to pay attention to a number of terminological nuances associated with the practical use of the corresponding indicator as a characteristic of the financial position of an enterprise.
Net assets or net worth?
For example, some experts believe that the term in question should be identified with the concept of equity. There is another point of view on this thesis. As regards the regulatory regulation of economic processes, in the corresponding Russian legal acts, the two indicated concepts are generally considered to be very similar or identical.
For example, Federal Law No. 226 dated July 18, 2011 states that banking institutions should not calculate net assets, but just their own funds in the order that is recorded in the legal acts issued by the Central Bank of the Russian Federation. Another noteworthy source of law is the Bank of Russia Letter No. 350, published on October 28, 1996. It states that net assets are an indicator that corresponds to the concept of the bank’s equity.
Thus, as regards credit and financial organizations, the concepts in question should be regarded as identical in them. Therefore, according to some researchers, approved in the same Order of the Ministry of Finance No. 84n and used to calculate such an indicator as the net assets of an LLC, the formula, in principle, can also be used to determine the amount of a company's equity. Which, in turn, is also a critical indicator of business performance.
There is a term very similar in sound to the considered one - “net current assets”.
What is net current assets
Under net current assets is meant the amount of equity of the company (that is, in one interpretation - the same net assets), as well as long-term liabilities, reduced by the amount of non-current assets. Some experts define the indicator in question as the difference between the total assets of the company, which are classified as negotiable, and the sum of all those liabilities of the company that are short-term.
What net current assets show
Net current assets - an indicator that is most often used to assess the financial and economic stability of the company in terms of the availability of its resources to pay off current debts, as well as investing in expansion of production. The term in question has another common name - net working capital.
Thus, the investor, considering the prospects of investments in a particular company (for example, LLC), can also pay attention to net current assets. The calculation formula for those can be supplemented by those that are used to determine the amount of equity. The larger both indicators are, the more attractive the firm may be for investment.