Asset-Based Valuation Approach: Net Asset Value and Adjusted Book Value

Understand Asset-Based Valuation Approach

Key rules to remember

Net asset value (book)

NAV = Total assets − Total outside liabilities

Use assets that are real. Exclude fictitious assets such as preliminary expenses and debit balance of P&L.

Adjusted net asset value

Adjusted NAV = Fair value of all assets (including unrecorded) − Fair value of all liabilities (including unrecorded)

Revalue each item. Add omitted items and remove overstated or fictitious ones.

Liquidation value of equity

Equity = Net realisable value of assets − Selling and liquidation costs − All liabilities

Preference capital ranks before equity. Secured and statutory dues rank as per the legal order of payment.

Value per equity share

Value per share = Value attributable to equity ÷ Number of equity shares

Deduct preference capital (with arrears if payable) before dividing.

Replacement cost of an asset

Replacement cost (net) = Current cost of equivalent new asset − Allowance for age and wear

Apply the allowance only if you are valuing an existing used asset.

How to solve Asset-Based Valuation Approach questions

1. 1Read the premise: going concern or liquidation. Note the date and whether the value asked is for the whole business, equity, or per share.
2. 2List all assets with book values. Strike out fictitious assets such as preliminary expenses, discount on issue and debit balance of P&L.
3. 3Restate each asset to the value given: fair, market, replacement or realisable. Add unrecorded assets such as patents or brands if the question gives values.
4. 4List all liabilities, including unrecorded or contingent ones the question says are likely to arise. Do not count reserves and surplus as liabilities.
5. 5For liquidation, deduct selling and winding-up costs and apply the payment order. Preference shareholders come before equity.
6. 6Compute net value to equity: adjusted assets − liabilities − preference capital and arrears, where applicable.
7. 7Divide by the number of equity shares if per-share value is asked. Show the working and state the premise in your conclusion.

Quickest way: Adjusted asset schedule in one pass

Common mistakes in Asset-Based Valuation Approach

• Deducting equity share capital and reserves as liabilities

  Students treat every credit balance on the liability side as a claim.

  Fix: Deduct only outside liabilities and preference claims. Share capital and reserves are what you are trying to value.

• Keeping fictitious assets in the asset total

  They appear on the balance sheet, so they look like assets.

  Fix: Remove preliminary expenses, discount on issue of shares and the debit balance of the P&L account. They have no realisable value.

• Ignoring liquidation costs under the liquidation premise

  Students stop at realisable values of assets.

  Fix: Deduct selling costs, legal fees and winding-up expenses before arriving at the amount for equity.

• Using liquidation value for a healthy running business

  Both values are called asset-based, so the premise is overlooked.

  Fix: Read the premise in the question. Use going-concern fair values unless closure or distress is stated.

• Forgetting unrecorded liabilities or assets

  Adjustments are listed in the notes below the balance sheet and are skipped.

  Fix: Go through every note. Add likely contingent liabilities and unrecorded intangibles when values are given.

• Dividing by the wrong share count

  Preference shares and equity shares are mixed up.

  Fix: Divide only by the number of equity shares, after deducting the preference amount from the net value.

Worked examples