Non-Physical or Going Concern Values

• DOI: 10.1177/000271621405300120
• Date: 01 May 1914
• Published date: 01 May 1914
• Author: Halbert Powers Gillette
• Subject Matter: Articles

214

NON-PHYSICAL

OR

GOING

CONCERN

VALUES

BY

HALBERT

POWERS

GILLETTE,

Consulting

Engineer,

New

York.

In

the

appraisal

of

all

public

utility

properties,

whether

for

rate

making

or

for

sale,

it is

now

recognized

that

a

&dquo;value&dquo;

should

be

assigned

to

the

attached

business

that

gives

to

the

physical

plant

its

real

or

market

value.

The

&dquo;value&dquo;

of

the

attached

business

is

often

called

the

&dquo;non-physical

value&dquo;

of

the

property.

Sometimes

the

term

&dquo;intangible

value&dquo;

is

used

to

designate

the

&dquo;non-physical

value.&dquo;

There

are

several

other

terms

in

common

use,

but

each

is

coming

gradually

to

be

associated

with

some

particular

theory

upon

which

the

appraisal

is

based.

No

appraisal

can

be

consistent

unless

it

is

based

upon

some

theory.

This

holds

as

true

of

an

appraisal

of

physical

property

as

of

non-

physical

property.

Two

distinct

appraisal

theories

have

evolved,

and

a

careful

study

of their

evolution

shows

that,

in

the

final

analysis,

one

theory

arises

from

the

conception

that

a

public

service

company

is

a

public

agent,

while

the

other

theory

arises

from

the

conception

that

a

public

service

company

is

subject

to

competitive

conditions.

The

agency

theory

leads

logically

to

an

appraisal

of

the

actual

cost

of

the

physical

and

non-physical

property.

The

competitive

theory

leads

logically

to

an

appraisal

of

the

market

value

of

the

physical

and

non-physical

property.

It

does

not

fall

within

the

scope

of

this

paper

to

discuss

the

effects

of

applying

these

two

theories

in

the

appraisal

of

the

physical

property

of

a

public

service

company.

But

one

or

two

deductions

may

serve

to

illuminate

the

essential

difference

between

the

two

theories.

The

agency

theory

gives

us:

(1)

Original

conditions

and

actual

quantities

involved

in

producing

the

plant;

(2)

actual unit

costs

incurred

under

those

conditions;

(3)

actual

prices

paid

for

real

estate;

and

(4)

actual

deficits

in

fair

return

during

the

development

period.

The

competitive

theory

gives

us:

(1)

Present

conditions

and

quantities

that

would

now

be

involved

in

reproducing

the

plant;

(2)

present

unit

costs;

(3)

present

market

value

of

real

estate;

and

(4)

the

capitalized

net

profits

(after

deducting

interest)

derivable

from

the

business.