Asset-Based Valuation Models for ACCA FM

Understand Asset-Based Valuation Models

Key rules to remember

Net asset value

Net asset value = Total assets − Total liabilities (including debt and preference shares)

Preference shares and long-term debt are deducted to leave the value attributable to ordinary shareholders.

Value per share

Value per share = Net asset value attributable to ordinary shareholders ÷ Number of ordinary shares

Use shares in issue, not the nominal value total.

Net book value basis

NBV of net assets = Carrying amounts of assets − Liabilities

Often exclude intangibles such as capitalised development or purchased goodwill if the question asks for tangible net assets.

Net realisable value basis

NRV of net assets = Estimated sale proceeds of assets − Selling and closure costs − Liabilities

Break-up basis. Include redundancy and liquidation costs if given.

Replacement cost basis

Replacement cost of net assets = Current cost of equivalent assets − Liabilities

Use the cost of equivalent assets in similar condition, not new ones, unless told otherwise.

How to solve Asset-Based Valuation Models questions

1. 1Read which basis is asked for: NBV, NRV, replacement cost, or a comparison of them.
2. 2List every asset and liability from the data, using the figures that suit that basis.
3. 3Adjust assets: replace book values with realisable or replacement values where given. Decide on intangibles and say why.
4. 4Deduct all liabilities, including long-term debt, and preference shares if present, plus any selling or closure costs for NRV.
5. 5Divide by the number of ordinary shares if a per-share value is needed.
6. 6Comment: say what the number means, which user it suits and what it ignores, such as earnings, cash flows and unrecorded intangibles.
7. 7 If asked to compare, say how it relates to a market or earnings-based value.

Quickest way: Three-line net assets table

Common mistakes in Asset-Based Valuation Models

• Forgetting to deduct long-term debt or preference shares.

  Students focus on current liabilities and the asset list.

  Fix: Take the liabilities from the whole statement of financial position and ask whether anyone ranks ahead of ordinary shareholders.

• Using book values when the question gives market or realisable values.

  The book figures appear first and look familiar.

  Fix: Underline the basis in the question and replace each affected asset before adding up.

• Ignoring costs of sale or closure under NRV.

  Students treat NRV as simply a sale price.

  Fix: Net realisable value is after costs. Deduct them when the data gives them.

• Including intangibles without comment.

  Students are unsure whether goodwill counts.

  Fix: State the treatment. Purchased goodwill is usually excluded on a break-up basis. Unrecorded brands may be added only if a value is given or can be justified.

• Presenting the asset value as the true value of a profitable company.

  The number looks precise.

  Fix: Say it ignores future earnings. Describe it as a floor or a cross-check, not the main value.

• Dividing by the wrong number of shares.

  Nominal value is confused with the number of shares.

  Fix: Number of shares = share capital ÷ nominal value per share, if only capital is given.

Worked examples