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Book Value Method

Asset-based valuation focuses on the future economic benefits generated by assets, with a distinction between green field and brown field investments. The valuation process is sensitive and relies on accurate financial data, including total assets and liabilities, with methods such as book value, replacement value, reproduction value, and liquidation value being commonly used. The book value method provides a transparent view of firm value based on historical accounting records, but may not accurately reflect the current market value of the business.

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1 views4 pages

Book Value Method

Asset-based valuation focuses on the future economic benefits generated by assets, with a distinction between green field and brown field investments. The valuation process is sensitive and relies on accurate financial data, including total assets and liabilities, with methods such as book value, replacement value, reproduction value, and liquidation value being commonly used. The book value method provides a transparent view of firm value based on historical accounting records, but may not accurately reflect the current market value of the business.

Uploaded by

Danica Zamora
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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ASSET-BASED VALUATION

Asset has been defined by the industry as transactions that would yield
future economic benefits as a result of past transactions. Hence, the value of
investment opportunities is highly dependent on the value that the asset will
generate from now until the future. The value should also include all cash
flows that will be generated until the disposal of the asset.
In practice, valuation is a sensitive and confidential activity in their
portfolio
management. Valuation should be kept confidential to allow the company to
negotiate a better position for them to acquire an opportunity. Since the
value of assets will depend on its ability to generate economic benefits, it is
more challenging to determine the value of a green field investment since
value shall be based on pure estimates compared to brown field investment.
Green field investments are investments that started from scratch while
brown field investments are those opportunities that can be either partially
or fully operational. Brown field investments are those already in the going
concern state, as most businesses are in the optimistic perspective that they
will grow in the future. Therefore, they can be considered as going concern
business opportunities (GCBOs). Going concern business opportunities are
those businesses that has a long term to infinite operational period.

The advantage of GCBOs is that we already have a reference for their


performance - from its historical performance or an existing business with a
similar nature. With this, the risk indicators can be identified easily and can
be quantified accordingly. The Committee of Sponsoring Organization of the
Treadway Commission (COS) suggests that risk management principles must
be observed in doing businesses and determining its value. It was noted in
their report that the benefits of having a sound Enterprise-wide Risk
Management allows the company to:

1. increase the opportunities;


2. facilitate management and identification of the risk factors that affect the
business:
3. identify or create cost-efficient opportunities
4 manage performance variability;
5. improve management and distribution of resources across the
enterprise; and
6. make the business more resilient to abrupt changes

The importance of identifying risks is to enable investors to quantify


the impact of the risk and/or the cost of managing these risks. Theoretically,
asset value
is dependent on the economic benefits (i.e. cash flows) it gives.

Since the entire company is driven by its asset base, the value of the
company
can be best attributed to the value of its assets. The advantage of using this
approach is it enables the analyst to validate the firm value through the
value of its assets. Some approaches may rely on the ability of the asset to
generate more revenues. However, this only focuses on the current and
historical value of the assets and will disregard the value it can generate in
the future and may not fully represent the true value of the assets.

In asset-based valuation, familiarity with the generally accepted


accounting
principles is a key attribute for an analyst to enable them to establish the
value. Asset-based valuation can be used if the basis of the value is
concretely established and complete. Information required for asset-based
valuation include total value of the assets, the financing structure (i.e. total
liabilities and total equity), classes of equity and other sources of funding.

Among the popular methods used to determine the value using assets
as its
bases are: (1) book value method; (2) replacement value method; (3)
reproduction value method; and (4) liquidation value method.

Book Value Method

Book value can be defined as the value recorded in the accounting


records
of a company: The book value is highly dependent on the value of the assets
as declared in the audited financial statements, particularly the balance
sheet or the statement of financial position. International Accounting
Standard No. 1 requires that the statement of financial position to
summarize the total value of its assets, liabilities and equity of a firm.

The assets are required to be categorized into current and non-current


assets. Current assets are those expected to be realized within the
company's normal operating cycle, expected to be realized within 12 months
after these transactions were reported, or held primarily for the purpose of
trading. Cash and cash equivalents may also be included only if it is not
restricted. On the other hand, assets wherein benefits can be realized in
more than 12 months are known as non-current assets.
On the other hand, liabilities is also categorized as current and non-
current.
Current liabilities are expected to be settled within the entity's normal
operating cycle, due to be settled within 12 months, held for the purpose of
trading or if the company does not have ability to settle beyond 12 months.
Non-current liabilities are liabilities which are due to be settled longer than
12 months.

In the book value method, the value of the enterprise is based on the
book
value of the assets less all non-equity claims against it. Hence, the formula is
as follows:

Total Assets – Total Liabilities


Net Book Value of
Number of Outstanding Shares
Assets =

To illustrate, Grape and Vines Corp. in the Year 20xx presented their
statement of financial position with the following balances: Current Assets is
Php500 Million; Non-current Assets is Php1 Billion; Current Liabilities is
Php200 Million; Non-current Liabilities is Php700 Million and the Outstanding
shares is 1 Million.

With the given information, the net book value of the assets is Php600
per
share computed as follows:
The advantage of using book value method is that it provides a more
transparent view on firm value and is more verifiable since this is based in
the figures reflected in the financial statements. However. the book value
only reflects historical value (only based on what is recorded in the
accounting books) and might not reflect the real value of the business now.

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