The "lowest value principle" is used for investments in Norfund's balance sheets, i.e. the lower of acquisition cost and estimated current value. This means that any value increase in equity investments are booked in the accounts only after the assets have been sold, while expected losses are booked immediately. The annual accounts give information on income, costs, write downs etc., while expected value increases are not included. For an investment fund like Norfund, which is in the build-up phase with relatively few sales, the accounts give limited information about the real results. Norfund's financial statements are based on the Norwegian accounting standards in accordance with the Norwegian accounting act and good accounting practice.
Valuation and estimated returns
Norfund regularly makes valuations of all individual investment. This gives a better and more realistic understanding of the actual value creation in the portfolio than the accounting results. Value adjusted equity at the end of 2012 was NOK 10,864 million, compared to the book value of equity of NOK 8,438 million in the balance sheet. Based on the valuations, Norfund also calculates estimated returns for each investment area and report this in the annual Report on Operations.
Investment returns are calculated as the internal rate of return of the cash flows of the investment, including the assumed value of the investment at the end of the year. The calculations are made in the investment currency to exclude the effect of exchange rate fluctuations. Norfund estimates the value of all of its investments on an annual basis. The valuations are our best estimate of the fair value of the investments at the end of the year, in accordance with the “International Private Equity and Venture Capital Valuations Guidelines”. Our valuations often prove to be somewhat conservative, and therefore they are often below the value of the ultimate realisation of the investments.