What Is Absorption Rate?

Absorption rate most commonly refers to a metric used in the real estate market to evaluate the rate at which available homes are sold in a specific market during a given time period. It is calculated by dividing the number of homes sold in the allotted time period by the total number of available homes. This equation can also be reversed to identify the amount of time it would take for the supply to be sold.

Absorption rate is also a key part of the accounting industry. In this context, absorption rate refers to the way in which businesses calculate their overhead costs.

Understanding Absorption Rate

Absorption rate provides insight into how quickly or slowly houses are selling in the real estate market. Absorption rate does not take into account additional homes that enter the market at various times. While an absorption rate calculation can be projected, it’s most commonly used based on current available data and actual inventory.

A high absorption rate may indicate that the supply of available homes will shrink rapidly. A homeowner is typically able to sell their property faster during periods of high absorption. However, the time period associated with an absorption rate calculation is important to consider.

Traditionally, an absorption rate above 20% signaled a seller’s market in which homes are sold quickly. An absorption rate below 15% is an indicator of a buyer’s market in which homes are not being sold as fast.

Influence in the Real Estate Market

In market conditions with low absorption rates, a real estate agent may be forced to reduce a listing price to entice a sale. Alternatively, the agent can increase the price without sacrificing demand for the home if the market has a high absorption rate. The absorption rate is also important for buyers and sellers to follow as they make decisions on the timing of purchases and sales.

The absorption rate is also a signal for developers to start building new homes, though developers often use long lead times to forecast periods of higher absorption. During market conditions with a high absorption rate, demand may be high enough to warrant the further development of properties. Meanwhile, periods with lower absorption rates indicate a cooling period for construction.

Appraisers use the absorption rate to determine the value of a property. Some procedures require an addendum showing that absorption rates were considered in appraisal calculations. In general, appraisers are responsible for analyzing market conditions and maintaining an awareness of the absorption rates for all types of appraisal values.

Most appraisers include this data metric in the neighborhood section of the appraisal forms. The current valuation of a home would be reduced during periods of decreased absorption rates and increased when absorption rates are high.

Lenders and banking institutions will also consider market conditions when evaluating loan and credit terms. During periods of low absorption, banks may feel tempted to entice clients to borrow money with more favorable loan terms. Alternatively, lenders can be more selective during high absorption periods as they are more likely to have a broader portfolio of prospective borrowers.

Example of the Absorption Rate

Suppose a city has 1,000 homes currently on the market to be sold. If buyers purchase 100 homes per month, the absorption rate is 10% (100 homes sold per month divided by 1,000 homes available for sale). This also indicates that the supply of homes will be exhausted in 10 months (1,000 homes divided by 100 homes sold/month).

Absorption Rate in Accounting

Absorption rate is also used in an entirely different manner in accounting.

In accounting, absorption rate (or the rate of absorption) is the rate at which companies calculate and allocate their overhead expenses. These are the costs associated with providing goods and services to their customers, though these expenses aren’t directly traceable to end products. As such, it’s also often called an overhead absorption rate.

Companies often have to use estimates to determine their overhead costs. That’s because they don’t know what the actual costs are until they come in. In order to determine their overhead, companies divide the total budgeted overhead costs divided by the total budgeted production base. This requires an adjustment at the end of the accounting period to make up for any difference between the predicted and actual costs.

Alternatively, a company may know its actual overhead costs but not know how to trace those costs to final products or services. To overcome this hurdle, companies use estimated cost drivers to guess what non-financial measures cause changes in financial measures.

This can be problematic, especially when companies use very conservative estimates to predict their costs. Doing so may throw off their balance sheets because the actual costs may be higher at the end of the reporting period or if costs fluctuate. However, this practice has the benefit of making sure all costs including estimated amounts and estimated allocations are included when evaluating their products.

The Bottom Line

The absorption rate is a very important metric used in the real estate and accounting.

Realtors use it to determine how many homes are sold in a particular area at any given time. These professionals can also use the rate to determine the kind of market they are facing, whether that’s a buyer’s, seller’s, or a balanced market. This rate is also important for the construction industry, as it indicates when developers should start buying.

Equally important, absorption rate is used in the accounting field—notably for companies to estimate their overhead. Absorption costing entails estimating overhead costs, determining overhead cost drivers, and having products absorb these untraceable costs.

What Is the Americans with Disabilities Act (ADA)?

The Americans with Disabilities Act (ADA) prohibits discrimination against people with disabilities and guarantees that they have equal opportunity to participate in mainstream American life. Passed in 1990, this federal law made it illegal to discriminate against a disabled person in terms of employment opportunities, access to transportation, public accommodations, communications, and government activities.

The ADA prohibits private employers, state and local governments, employment agencies, and labor unions from discriminating against those who have disabilities. Under the ADA, employers are also required to make reasonable accommodations for an employee with a disability to perform their job function.

Understanding the Americans with Disabilities Act

To be covered by the ADA, a person must have a physical or mental impairment that substantially limits one or more major life activities. Three major sections comprise the primary protections introduced by the ADA.

Title I of the law prohibits discrimination against qualified individuals with disabilities during job application procedures, hiring, firing, the pursuit of career advancement, compensation, job training, and other aspects of employment. It holds authority over employers who have 15 or more employees.

Title II applies to state and local government entities. This part of the law further extends the protection from discrimination to qualified individuals with disabilities. It requires that these individuals have reasonable access to services, programs, and activities provided by the government.

Title III prohibits discrimination against people with disabilities regarding access to activities at public venues. This includes businesses that are generally open to the public, such as restaurants, schools, day care facilities, movie theaters, recreation facilities, and doctors’ offices. The law also requires newly constructed, rebuilt, or refurbished places of public accommodation to comply with ADA standards. In addition, Title III applies to commercial facilities that include privately owned, nonresidential facilities such as factories, warehouses, or office buildings.

Different government agencies play a role in enforcing the ADA. For example, the Equal Employment Opportunity Commission (EEOC) enforces Title I. The Department of Labor enforces state and local government services under Title II and public accommodations under Title III.

How the Americans with Disabilities Act Increased Accessibility 

The ADA established standards for accessible design for public accommodations that include creating automatic doorways, ramps, and elevators to accommodate wheelchairs. Water fountains must be made available at heights that individuals with disabilities can reach.

Some examples of accommodations in the workplace include supplying a hearing-impaired applicant with a sign language interpreter during a job interview, modifying a work schedule to meet the needs of a person who needs treatment, or restructuring an existing facility to make it readily accessible to people with disabilities. An employer is not required by the ADA to make reasonable accommodations if doing so presents an undue hardship for the business and requires significant expenses compared with the size of the company.

Title IV of the ADA requires telephone companies to provide telephone relay services, or similar devices, for the hearing- and speech-impaired.

What Is Annualized Total Return?

An annualized total return is the geometric average amount of money earned by an investment each year over a given time period. The annualized return formula is calculated as a geometric average to show what an investor would earn over a period of time if the annual return was compounded.

An annualized total return provides only a snapshot of an investment’s performance and does not give investors any indication of its volatility or price fluctuations.

Understanding Annualized Total Return

To understand annualized total return, we’ll compare the hypothetical performances of two mutual funds. Below is the annualized rate of return over a five-year period for the two funds:

• Mutual Fund A Returns: 3%, 7%, 5%, 12%, and 1%
• Mutual Fund B Returns: 4%, 6%, 5%, 6%, and 6.7%

Both mutual funds have an annualized rate of return of 5.5%, but Mutual Fund A is much more volatile. Its standard deviation is 4.2%, while Mutual Fund B’s standard deviation is only 1%. Even when analyzing an investment’s annualized return, it is important to review risk statistics.

Annualized Return Formula and Calculation

The formula to calculate annualized rate of return needs only two variables: the returns for a given period of time and the time the investment was held. The formula is:


$\begin{aligned} \text{Annualized Return} = &\big ( (1 + r_1 ) \times (1 + r_2) \times (1 + r_3) \times \\ &\dots \times (1 + r_n) \big ) ^ \frac{1}{n} – 1 \\ \end{aligned}$Annualized Return=​((1+r1​)×(1+r2​)×(1+r3​)×⋯×(1+rn​))n1​−1​

For example, take the annual rates of returns of Mutual Fund A above. An analyst substitutes each of the “r” variables with the appropriate return, and “n” with the number of years the investment was held. In this case, five years. The annualized return of Mutual Fund A is calculated as:


$\begin{aligned} \text{Annualized Return} &= \big ( (1 + .03) \times (1 + .07) \times (1 + .05) \times \\ &\quad \quad (1 + .12) \times (1 + .01) \big ) ^ \frac{1}{5} -1 \\ &= 1.309 ^ {0.20} – 1 \\ &= 1.0553 – 1 \\ &= .0553, \text{or } 5.53\% \\ \end{aligned}$Annualized Return​=((1+.03)×(1+.07)×(1+.05)×(1+.12)×(1+.01))51​−1=1.3090.20−1=1.0553−1=.0553,or 5.53%​

An annualized return does not have to be limited to yearly returns. If an investor has a cumulative return for a given period, even if it is a specific number of days, an annualized performance figure can be calculated; however, the annual return formula must be slightly adjusted to:


$\begin{aligned} &\text{Annualized Return} = ( 1 + \text{Cumulative Return} ) ^ \frac {365}{ \text{Days Held} } – 1 \\ \end{aligned}$​Annualized Return=(1+Cumulative Return)Days Held365​−1​

For example, assume a mutual fund was held by an investor for 575 days and earned a cumulative return of 23.74%. The annualized rate of return would be:


$\begin{aligned} \text{Annualized Return} &= ( 1 + .2374) ^ \frac{365}{575} – 1 \\ &= 1.145 – 1 \\ &= .145, \text{or } 14.5\% \\ \end{aligned}$Annualized Return​=(1+.2374)575365​−1=1.145−1=.145,or 14.5%​

Difference Between Annualized Return and Average Return

Calculations of simple averages only work when numbers are independent of each other. The annualized return is used because the amount of investment lost or gained in a given year is interdependent with the amount from the other years under consideration because of compounding.

For example, if a mutual fund manager loses half of her client’s money, she has to make a 100% return to break even. Using the more accurate annualized return also gives a clearer picture when comparing various mutual funds or the return of stocks that have traded over different time periods. 

Reporting Annualized Return

According to the Global Investment Performance Standards (GIPS)—a set of standardized, industry-wide principles that guide the ethics of performance reporting—any investment that does not have a track record of at least 365 days cannot “ratchet up” its performance to be annualized.

Thus, if a fund has been operating for only six months and earned 5%, it is not allowed to say its annualized performance is approximately 10% since that is predicting future performance instead of stating facts from the past. In other words, calculating an annualized rate of return must be based on historical numbers.

The Bottom Line

Annualized total return represents the geometric average amount that an investment has earned each year over a specific period. By calculating a geometric average, the annualized total return formula accounts for compounding when depicting the yearly earnings that the investment would generate over the holding period. While the metric provides a useful snapshot of an investment’s performance, it does not reveal volatility and price fluctuations.

What Is an Amalgamation?

An amalgamation is a combination of two or more companies into a new entity. Amalgamation is distinct from a merger because neither company involved survives as a legal entity. Instead, a completely new entity is formed to house the combined assets and liabilities of both companies.

The term amalgamation has generally fallen out of popular use in the United States, being replaced with the terms merger or consolidation even when a new entity is formed. But it is still commonly used in countries such as India.

Understanding Amalgamations

Amalgamation typically happens between two or more companies engaged in the same line of business or those that share some similarity in operations. Companies may combine to diversify their activities or to expand their range of services.

Since two or more companies are merging together, an amalgamation results in the formation of a larger entity. The transferor company—the weaker company—is absorbed into the stronger transferee company, thus forming an entirely different company. This leads to a stronger and larger customer base, and also means the newly formed entity has more assets.

Amalgamations generally take place between larger and smaller entities, where the larger one takes over smaller firms.

The Pros and Cons of Amalgamations

Amalgamation is a way to acquire cash resources, eliminate competition, save on taxes, or influence the economies of large-scale operations. Amalgamation may also increase shareholder value, reduce risk by diversification, improve managerial effectiveness, and help achieve company growth and financial gain.

On the other hand, if too much competition is cut out, amalgamation may lead to a monopoly, which can be troublesome for consumers and the marketplace. It may also lead to the reduction of the new company’s workforce as some jobs are duplicated and therefore make some employees obsolete. It also increases debt: by merging the two companies together, the new entity assumes the liabilities of both.

Amalgamation Procedure

The terms of amalgamation are finalized by the board of directors of each company. The plan is prepared and submitted for approval. For instance, the High Court and Securities and Exchange Board of India (SEBI) must approve the shareholders of the new company when a plan is submitted.

The new company officially becomes an entity and issues shares to shareholders of the transferor company. The transferor company is liquidated, and all assets and liabilities are taken over by the transferee company.

Example of Amalgamation

In late 2021, it was announced that media companies Time Warner and Discovery, Inc. would combine in a deal worth an estimated $43 billion. Owned by AT&T, Time Warner (which the telecom company acquired in 2018) would be spun off and then amalgamated with Discovery. The new entity, known as Warner Bros. Discovery, Inc., is expected to close at some point in late 2022 and will be headed by Discovery CEO David Zaslav.

Types of Amalgamation

One type of amalgamation—similar to a merger—pools both companies’ assets and liabilities, and the shareholders’ interests together. All assets of the transferor company become that of the transferee company.

The business of the transferor company is carried on after the amalgamation. No adjustments are made to book values. Shareholders of the transferor company holding a minimum of 90% face value of equity shares become shareholders of the transferee company.

The second type of amalgamation is similar to a purchase. One company is acquired by another, and shareholders of the transferor company do not have a proportionate share in the equity of the combined company. If the purchase consideration exceeds the net asset value (NAV), the excess amount is recorded as goodwill. If not, it is recorded as capital reserves.