Asset-Based Valuation for CA Final AFM

Understand Asset-Based Valuation

Key rules to remember

Net asset value (NAV) of equity

Net asset value = Value of assets − Outside liabilities − Preference share capital

Outside liabilities include debentures, loans and current liabilities. Deduct preference capital (with arrears, if given) to reach the equity amount.

Value per equity share

Value per share = Net asset value for equity ÷ Number of equity shares

Use shares outstanding. If partly paid shares exist, adjust as the question directs.

Book value of equity (alternative)

Equity net worth = Equity share capital + Reserves and surplus − Fictitious assets

Fictitious assets include preliminary expenses and accumulated losses shown as assets. They have no realisable value.

Liquidation value

Liquidation value = Realisable value of assets − Liabilities − Liquidation costs

Use realisable values, not book values. Deduct winding-up expenses before the amount reaches equity.

Going concern value with goodwill

Value of business = Net asset value at fair values + Goodwill (if the question asks for it)

Add goodwill only when it is given or must be computed under a stated method.

How to solve Asset-Based Valuation questions

1. 1Identify the basis asked: book value, fair value, replacement cost or liquidation value.
2. 2List all assets. Replace book figures with the revalued or realisable amounts given. Remove fictitious assets such as preliminary expenses and accumulated losses.
3. 3Add assets not on the balance sheet if the question mentions them, such as unrecorded investments or goodwill.
4. 4List all outside liabilities, including contingent liabilities that are likely to crystallise and any unrecorded liability the question mentions.
5. 5Subtract liabilities from assets. In liquidation, also subtract winding-up costs.
6. 6Deduct preference share capital and any arrears payable to reach the equity amount.
7. 7Divide by the number of equity shares to get value per share, if asked.
8. 8State the answer with the basis and one line of interpretation.

Quickest way: Adjust-the-net-worth shortcut

Common mistakes in Asset-Based Valuation

• Treating preliminary expenses or accumulated losses as assets

  They appear on the asset side of the balance sheet, so students add them up automatically.

  Fix: Exclude fictitious assets in every valuation. They cannot be sold for cash.

• Using book values when the question gives revalued or realisable figures

  Students start from the balance sheet and forget to replace figures.

  Fix: Underline every revaluation in the question and tick it off as you apply it.

• Forgetting liquidation expenses

  The asset sale proceeds feel like the final number, so the costs are missed.

  Fix: In liquidation questions, deduct winding-up costs before computing the equity share.

• Not deducting preference capital before dividing by equity shares

  Students treat all capital as equity.

  Fix: Subtract preference capital, plus arrears if stated, then divide by equity shares only.

• Mixing bases, such as replacement cost for some assets and book value for others without being told

  Different data points are given and students apply them inconsistently.

  Fix: State your basis at the start and use only figures that fit it, unless the question specifies a mix.

• Ignoring that a tax effect or contingent liability may be given

  Students focus on the assets and skip the liability notes.

  Fix: Read all notes. Include a contingent liability only if the question says it is likely to be payable.

Worked examples