A method for valuing the entire equity in a company. SVA assumes that the value of a business is the net present value of its future cash flows, discounted at the appropriate cost of capital. Once the value of a business has been calculated in this way, the next stage is to calculate shareholder value using the equation:
shareholder value = value of business – debt.
This method was first developed by Alfred Rappaport in the 1980s. The key difference between traditional financial accounting and SVA is that the latter recognizes the time value of money. The traditional balance sheet and profit and loss account report on the past performance of a company is not helpful when measuring the change in value of the company. See also value driver.
Subjects: Financial Institutions and Services — Accounting.