What is Value?

Value: More Than Just a Number

As forensic accountants and business valuers, we encounter the term value in many forms. While we won’t wade into moral or philosophical debates about intrinsic or extrinsic value, it’s worth noting just how fluid and purpose-driven this term becomes in professional contexts.

Let’s explore what value means across accounting, economics, and business valuation.

Value – In Accounting Terms

Accountants use the term ‘value’ in several distinct ways, each tied to financial reporting and compliance standards. Common definitions include:

• Historical Cost Value – The original purchase price of an asset.

• Replacement Cost Value – The cost to replace an asset at today’s prices.

• Net Realisable Value – Often applied to inventory, this is the estimated net amount a business can expect to receive if the asset were sold.

• Written-Down Value – The value of an asset after accounting for depreciation.

• Value in Use – The present value of future cash flows expected from the asset’s continued use.

Each measure serves a specific purpose and cannot be used interchangeably without distorting financial reporting.

Value – In Economic Theory

Economists often substitute the term value with price, but this isn’t always a straightforward switch. Theories diverge widely here, particularly between rationalists and behaviouralists.

Rationalists and the Efficient Market Hypothesis

Rationalist economists support the Efficient Market Hypothesis (EMH), which argues that stock prices reflect all available information. The sheer volume of analysts constantly seeking arbitrage opportunities leads to a rapid correction between price and value.

Behaviouralists and Market Bubbles

In contrast, behavioural economics highlights irrational investor behaviours—particularly during bubbles. Think of the market crashes of 1929 and 2007. Greed drove prices well beyond intrinsic value, eventually leading to painful corrections.

For everyday Australians, it’s easy to understand behavioural value by watching a bidding war on eBay. Just because someone paid $800 for a collector’s item doesn’t mean it’s worth $800 to anyone else.

Value – In Business Valuation

When valuing a business, the term ‘value’ becomes even more nuanced. There are many use cases for a business valuation, including:

• Compliance with accounting standards

• Taxation and capital gains events

• Buying or selling a business

• Dispute resolution or litigation

In many instances, there is no active market for the business being assessed, or the transaction may not occur at arm’s length—particularly in family or private business scenarios.

As a result, professional valuers adopt a definition of value that assumes:

• A hypothetical market

• A willing, knowledgeable buyer and seller

• No compulsion to transact

• An arm’s length transaction

This framework underpins terms like market value, fair value, and fair market value—each with minor technical distinctions but built on the same conceptual foundation.

The Importance of Context

Valuation is not static. A business assessed before a market crash may be valued on a ‘going concern’ basis, assuming it will continue to trade profitably. That same business might be assessed weeks later on a ‘fire-sale’ basis due to liquidity pressures.

Another critical concept is special value, which refers to unique benefits or synergies a specific buyer might derive. This is often seen in strategic acquisitions where a buyer can unlock more value than others.

Final Thoughts

At the end of the day, value isn’t a universal truth—it’s a purpose-driven estimate. Whether for accounting, litigation, or investment, the correct interpretation of value depends entirely on the context and intended use.

If you're seeking a business valuation tailored to your specific needs, get in touch with the Dolman Bateman team. We provide independent, expert assessments that stand up to scrutiny.

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Disclaimer:

The information provided in this article is general in nature and does not constitute personal financial, legal or tax advice. While every effort has been made to ensure the accuracy of this content at the time of publication, tax laws and regulations may change, and individual circumstances vary. Dolman Bateman accepts no responsibility or liability for any loss or damage incurred as a result of acting on or relying upon any of the information contained herein. You should seek professional advice tailored to your specific situation before making any financial or tax decision.