Asset-Based Valuation Methods for ACCA AFM

Understand Asset-Based Valuation Methods

Key rules to remember

Net asset value

NAV = Total assets − Total liabilities

Liabilities include debt and any preference shares if you want the value for ordinary shareholders. Book basis unless adjusted.

Adjusted NAV

Adjusted NAV = Σ revalued assets − Σ revalued liabilities

Use replacement cost or realisable value for each asset as the scenario requires. Include unrecorded assets and liabilities, such as contingent liabilities or a pension deficit.

Value per share

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

Deduct preference shares first. Use shares in issue.

Realisable value (net)

Net realisable value = Expected sale proceeds − Costs of disposal

Also deduct redundancy and closure costs in a break-up valuation.

Implied goodwill

Goodwill = Price paid or earnings-based value − Adjusted NAV

Shows how much of the price relates to earning power and not to identifiable assets.

How to solve Asset-Based Valuation Methods questions

1. 1Identify the basis the question wants or the one that suits the scenario: book, replacement cost or realisable value. Note the buyer's purpose.
2. 2List all assets and liabilities from the data. Check for items missing from the balance sheet, such as internally generated brands or contingent liabilities.
3. 3Revalue each asset on the chosen basis. Replace book values with current replacement cost, or with sale proceeds less disposal costs.
4. 4Revalue liabilities. Add unrecorded liabilities, redundancy or closure costs, and tax on gains if the question gives them.
5. 5Subtract total liabilities, and any preference shares, from total assets to get the value for ordinary shareholders.
6. 6Divide by the number of ordinary shares if a price per share is needed.
7. 7Compare the result with any earnings-based value or offer price and compute implied goodwill if useful.
8. 8State the limitations that fit the scenario: intangibles, going concern, valuation uncertainty and ignored synergies. Then give a recommendation.

Quickest way: Adjust-and-subtract table

Common mistakes in Asset-Based Valuation Methods

• Using book values when the question asks for replacement cost or realisable value.

  Students copy the balance sheet figures because they are easy to find.

  Fix: Underline the basis in the requirement first. Replace every asset the question gives a new figure for.

• Forgetting disposal costs, redundancy costs or tax in a realisable value valuation.

  Students focus on the sale price and treat it as cash received.

  Fix: Net every sale price of costs of disposal and deduct closure costs as liabilities. Check the data for tax on gains.

• Not deducting preference shares and debt before valuing the ordinary shares.

  Students use total net assets without checking who has the first claim.

  Fix: Subtract all prior claims. Only then divide by ordinary shares.

• Treating asset-based value as the true value of a profitable business.

  The method looks objective and precise.

  Fix: Say it ignores earning power and intangibles. Show implied goodwill or compare with a cash flow or P/E valuation.

• Giving a list of limitations that is not tied to the scenario.

  Students memorise generic points.

  Fix: Link each limitation to the target: a software firm has mostly intangibles, a manufacturer has specialised assets with poor resale value.

• Using replacement cost for a business the buyer would never rebuild.

  Students apply the method mechanically.

  Fix: Say when each basis is relevant: replacement cost for a ceiling for a start-up alternative, realisable value for a floor in distress.

Worked examples