Entity-specific Value
Entity-specific value can be defined as the value that an entity expects to arise from the continuing use of an asset and from its disposal at the end of its useful life or expects to incur when settling a liability discounted at its present value. Present value simply means the current value of the inflow or outflow that the entity is going to expect or incur in the future.
For example, if a company has an operational non-current asset, the asset will generate monetary returns for the company throughout its useful life and could be sold for an amount at some point in the future. These benefits are added together and discounted at an appropriate discount rate to arrive at the entity-specific value.
An example of entity-specific value for liability is when a company takes out a loan for which it pays an amount each year and settles the rest of the liability at the end of the loan term.
Difference Between Fair Value And Entity-specific Value
Entity-specific Value is sometimes correlated with fair value but there is a clear distinction between both accounting terminologies.
Fair value is the practice of measuring liabilities and assets at the present market value whereas the entity-specific value is the present value of the cash flows that an entity expects from using the asset and from its disposal or expected outflows when settling a liability.
Calculation
The calculation of entity-specific value is pretty straightforward. Here is how you can calculate the value.
Question: A company bought an asset that will generate $100/year for 5 years and will be sold at $500 at the end of year 5. The discount rate is 10%. Calculate the entity-specific value? (Check out the present value table for discount rates)
Solution:
To find the entity-specific value, we need to first discount the $100 that the asset is going to generate each year and then discount the $500 disposal value.
year1- 100*0.909= 90.9
year2- 100*0.826= 82.6
year3- 100*0.751= 75.1
year4- 100*0.683= 68.3
year5- 100*0.621= 62.1 + 310.5 (500*0.621)
(see the above pv table for rates)
Entity-specific Value= $689.5
