Final answer:
Fair Value measurement can cause volatility in the Net Operating Assets (NOA) calculation for the following period due to changes in asset and liability valuations, which are influenced by market conditions and valuation techniques.
Step-by-step explanation:
The impact of Fair Value measurement on Net Operating Assets (NOA) calculation for the next period (NOA(t+1)) can indeed be significant. NOA is a crucial component in calculating Economic Value Added (EVA) and is used to assess the operating efficiency of a business apart from its financing structure. When assets and liabilities are measured at fair value, the volatility in their valuation may lead to fluctuations in NOA. The fair value is determined by the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
For instance, if the fair value of an asset increases, the company's NOA may also increase, assuming liabilities remain constant. Conversely, a decrease in the fair value of an asset or an increase in the fair value of a liability will decrease NOA. Hence, changes in market conditions and valuation techniques that impact the fair value measurement can directly affect the NOA(t+1) calculation. This is why it is essential for analysts and investors to understand the principles of fair value accounting to correctly interpret the financial statements, specifically the statement of financial position that lists the company's assets and liabilities.