Economic Damages Calculations

Posted in Forensics and Investigations on May 22, 2024
Economic Damages Calculations

Economic damages calculations are generally calculated as the difference between the monetary value of an asset or stream of cash flows at a certain point in time relative to the value of those same assets. Once causation is determined, the economic damages expert calculates damages by determining the difference between the actual value and the supposed value.

Economic Damages Calculations

Economic Damages Calculations

Is there an economic formula for damages?

Although there is no specific formula for calculating economic damages, generally, one must calculate the value of the particular asset for the inappropriate action or negligence.

For example, if a portfolio is mismanaged, then the damages expert would compare the actual portfolio value to the value of a portfolio that is similar but not mismanaged.

Another example is damage from defamation, or wrongful termination would be based on the difference between the post-termination or defamation expected stream of cash flows or earnings and the stream of cash flows or earnings that would have occurred without the defamation or wrongful termination.

Calculation Of Losses

Examples of economic losses include lost profits, lost earnings, lost business value, lost investment value.

Data on historic performance before the wrongful act can be helpful to extrapolate future expected performances. In some cases, lost profits and lost business value can both be claimed in the same case.

Example economic damages model

Examples of economic damage models include lost profits as lost sales less the cost associated just with those lost sales, lost earnings as expected earning multiplied by work-life expectancy given the plaintiff’s age, sex, and level of education, diminution in business value which involves calculating the value of the business before the wrongful act less the value of the business after the wrongful act.

The above examples provide a general formula for calculating economic damages; the exact formula will be specific to the facts of the particular case.

For example, in the case of theft of trade secrets, the aggrieved party may recover damages associated with profits made by the defendant as a result of the theft.

Who Does Economic Damages Calculations?

Economic damages are calculated by either accountants or economists. Both must know accounting data and statistical methodologies to properly calculate damages using such data. Be warned that a pure economist with no knowledge of accounting or a pure accountant with no knowledge of economic theory or statistical methods may be the wrong expert for determining economic damages acceptable in court or arbitration.

Final Thoughts

In business, commercial dispute resolution has become an unavoidable certainty. Anyone who has even heard of a breach of contract case knows that it can result in a significant loss of profits and/or business value for the harmed party (plaintiff). A thorough and fully documented analysis of economic damages is frequently the key to a successful litigation. Such an analysis assists in quantifying the amount of loss caused by (an) allegedly harmful act(s), with the goal of compensating the plaintiff so that it achieves the same economic position it would have been in if the harmful act had not occurred.

Courts have provided little guidance in terms of the appropriate methods to use in order to achieve this goal over time, which means that it is up to financial experts to implement one method or another based on the specifics of each individual case.