June 2007 Capital Adequacy Extension © Copyright 2007, CCRO. All rights reserved. Page 20 of 92 only should such items as cash and net accounts receivable be included, but also collateral and margin requirements. The value of these assets is the accounting or book value as depicted on the balance sheet. Figure 3.2 illustrates the tree of components of invested capital relevant for an energy related company. Figure 3.2 3.1.3. Total Asset Determination: Market Value The alternative approach is to estimate the expected present value of cash flows based on the earning power of the assets. It is important to realize that many times there are significant embedded options that impact the absolute level of cash flows these options are most likely driven by those variables that affect market, operational/operations, and credit risks. These risks and modeling these variables are discussed later in this document. 3.1.4. Total Asset Determination: Invested Capital vs. Market Value One aspect to consider when evaluating the invested capital approach vs. market value approach is whether your company is “asset light” (i.e. pure energy trading) or “asset heavy” (i.e. merchant generator). The asset light balance sheet is more likely to record assets at market value, as well as be more “forward looking”, which makes it a Total Assets Other Long Term Assets Net PP&E Operating Working Capital Short-Term Risk Management Assets Operating Current Assets Other Cash Margins Inventories Accounts Receivable Total Invested Capital Long-Term Risk Management Assets