9.11 Conclusions
The above analysis is clearly a first pass analysis and one that
you can modify using the current best input estimates to the
model that you can derive.
After working through the IBM example provided in this
chapter you should then focus attention on the stocks that you
are working with.
One answer to this question is that in practice the consolidation process introduces many imperfections into "clean surplus accounting" and projections made from current financial statements. This is because in practice comprehensive income is still the result of "dirty surplus accounting." Practical imperfections range from the different applications of foreign currency translation assumptions across different subsidiaries, to information slippage arising from differential aggregation standards applied across subsidiaries all the way to not measuring important classes of assets such as human capital. All of these issues influence the degree to which clean surplus deviates from it's ideal measure. In addition, these imperfections can have a major impact upon a firm's assessed intrinsic value.
For example, an Amazon is more reliant upon "know how" and human capital than for example a "bricks and mortar" retailer is that relies upon location of super stores when generating revenue. These "omitted variables" have a differential impact upon the balance sheet and income statements. For example, the benefits from expert human capital is reflected in earnings but not capitalized on a balance sheet. As such different valuation techniques that place a different emphasis upon projected future balance sheets versus income statements will result in different assessments of intrinsic value and thus different models for assessing this value.
In the next chapter we will discuss what happens when another important assumption is relaxed, the "going concern" assumption and how this again changes our approach to the problem of assessing intrinsic value.