Emerging Practices for Capital Adequacy © Copyright 2003, CCRO. All rights reserved. 12 Table 2: Strengths and Weaknesses of Net Assets Measured with the Market Value Alternative Strengths Weaknesses ▪ More likely reflects true economic value of assets available and of expected cash flows ▪ May reflect price that someone is willing to pay for the assets ▪ Valuation is independent of accounting characteristics ▪ Not readily available to external stakeholders ▪ Requires assumptions in customer behavior and product sales growth ▪ Often no active market or pricing curves exist to establish values ▪ Markets may move given large liquidation ▪ Does not provide a link to the accounting balance sheet The decision to use invested capital or an estimation of market value to measure net assets rests with individual companies. It should be recognized, however, that in some situations, estimating the market value of assets might reveal sensitive information to external parties. In such situations, it would not be unusual for companies to provide information on risks but stop short of taking their economic capital requirements all the way to the assessment of their market values. Regardless of the method chosen for internal assessment of capital adequacy, companies need to be aware of the potential difference in results between the two methods. Outside parties such as rating agencies and lending institutions that are concerned with the capital requirements for an individual company may make their own assumptions about the market value of assets. The following sections further develop the economic capital concept and its three components (market risk, credit risk, and operative risk) used to assess economic value.