Assets-Based Valuation Methods

ACCA P4考試：Assets-Based Valuation Methods

Net Book Value (NBV)

Simply uses the "balance sheet" equation:

Equity = assets – liabilities

Problems and weaknesses of this method include:

Statement of financial position (balance sheet) values are often based on historical cost rather than market values.

Net book value (also called carrying amount) of assets depends on depreciation/ amortisation policies.

Many key assets are not recorded on the balance sheet (e.g. internally generated goodwill).

Net Realisable Value (NRV)

This estimates the liquidation value of the business:

Equity = estimated net realisable value of assets - liabilities

This may represent the minimum price that might be acceptable to the present owner of the business.

Problems and weaknesses of this method include:

Estimating the NRV of assets for which there is no active market (e.g. a specialist item of equipment).

It ignores unrecorded assets (e.g. internally-generated goodwill).

Replacement Cost

This can be viewed as the cost of setting up an identical business from nothing

Equity = estimated depreciated replacement cost of net assets

This may represent the maximum price a buyer might be prepared to pay.

Problems and weaknesses of this method include:

Technological change means it is often difficult to find comparable assets for the purposes of valuation;

It ignores unrecorded assets.

" Book Value-Plus"

Even using replacement cost suffers the problem of ignoring unrecorded assets (e.g. goodwill).

A possible solution is to use one the of formulae below:

Equity value = replacement cost of net assets + (m × annual profits)

Equity value = replacement cost of net assets + (m × annual revenue)

The factor m is agreed by negotiation and is designed to compensate the seller for the value of the business goodwill.

This method of valuation is often used in practice to place a value on a small business.