Asset base is a value of assets that gives value to a company or investment. The asset base is variable in time. The company therefore can sell an buy assets and change its asset base. Substantial change in asset base is an important signal for investors. It can be an effect of problems or to the contrary, opportunities.
In case of loans, asset base is taken by lenders as a guarantee that the company is able to pay the loan at least to the value of asset base. Thus asset base backs loan in case it couldn't be repaid.
"The asset base of a firm is the total value of tangible and intangible assets or benefits in the books of or owned by a bank which are used in the ordinary activities of the bank in generating income, determined by their book value, market value or residual value, including cash, machinery, inventory, land, building, enforceable claims, intellectual property rights, and goodwill" (D.W. Dagogo, P.I. Okorie 2014, p.283). According to Accounting Principles asset is the one side of balance sheet the other contains liabilities and owners equity. Thus long term liability and owners equity must be the same as net assets. It means that funds from owners equity and funds which were borrowed are intended to buy assets and then these assets are used in firm's common business.
The regulatory asset base(RAB)
The purpose of creation The Regulatory Asset Base(RAB) model was to valuate the assets in the field of the privatization process in The Great Britain due to providing privatized network tools specifying the rules for calculating price limits. The regulatory asset base model in which private sector is inserted into financing, operation of infrastructure and delivery. "In the RAB model, private(or corporatised state-owned) companies act as the infrastructure manager: they own, invest in and operate infrastructure assets." (D.Makovšek, D.Veryard 2016, pp. 6-7,12). In order to get back investment costs and finance its business this infrastructure manager gets charges revenue from customers. The most important advantage of RAB is that it is characterized by the undermost financing costs just slightly above the level of government bonds.
The Evolution and Development of RAB
"The key concept behind the RAB is FCM (financial capital maintenance)." (J.Stern 2013, pp.4-5). In general RAB and FCM concern the matter of maintaining the financial capacity of the company. In the 80s of the 20th century RAB has been applied as a control method for nationalized UK industries.
- Dagogo D.W., Okorie P.I.(2014). Post Consolidation Asset Base: Effect on Financial Leverage, Efficiency and Profitability of Nigerian Banks, "Canadian Center of Science and Education", Vol.6, No.10
- Makovšek D., Veryard D.(2016). The Regulatory Asset Base and Project Finance Models: An Analysis of Incentives for Efficiency, "International Transport Forum", p.6,7,12
- Newbery D.M.(1997). Determining the regulatory asset base for utility price regulation. Utilities Policy, 6(1), 1-8.
- Stern J.(2013). The role of the regulatory asset base as an instrument of regulatory commitment, "CCRP Working Paper", No.22
Author: Karolina Korbut