Net Asset Value and Other Asset-Based Methods of Valuation

Understand Net Asset Value and Other Asset-Based Methods

Key rules to remember

Net asset value (book)

NAV = Total assets − Outside liabilities (including preference share capital)

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

Adjusted net asset value

Adjusted NAV = Fair value of assets (incl. unrecorded) − Fair value of liabilities (incl. probable contingent liabilities)

Adjust for revaluation, unrecorded items and tax effect on revaluation only if the question asks.

Value per equity share

Value per share = Net assets available to equity shareholders ÷ Number of equity shares

Net assets here are after deducting preference capital and arrears of preference dividend, if any.

Liquidation value

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

Assets are taken at forced-sale values. Secured and preferential claims rank before equity.

Replacement cost (net)

Net replacement cost = Current cost of new equivalent asset − Depreciation for age and obsolescence

Then deduct liabilities to reach equity value.

How to solve Net Asset Value and Other Asset-Based Methods questions

1. 1Identify the premise from the question: going concern or liquidation. This decides whether you use fair value or realisable value.
2. 2List assets from the balance sheet. Strike out fictitious assets such as preliminary expenses, discount on issue of shares and the debit balance of the P&L account.
3. 3Revalue each asset as instructed. Add unrecorded assets given in the facts, such as goodwill or patents, only if the question supplies a value.
4. 4List all liabilities: current, long-term and, if stated, probable contingent liabilities and arrears of preference dividend. Remove any non-liability such as reserves and surplus.
5. 5Compute net assets: adjusted assets less liabilities. Deduct preference share capital to reach equity net assets.
6. 6Divide by the number of equity shares to get value per share. Check whether partly paid shares need adjustment.
7. 7State the answer with a one-line comment on limitations, and, if relevant, compare with liquidation value.

Quickest way: Two-column adjustment table

Common mistakes in Net Asset Value and Other Asset-Based Methods

• Treating reserves and surplus as liabilities

  They appear on the liabilities side of the balance sheet.

  Fix: Reserves belong to equity holders. Deduct only outside liabilities and preference capital.

• Including preliminary expenses or the P&L debit balance as assets

  Students copy the asset side without checking whether it has realisable value.

  Fix: Exclude all fictitious assets before computing net assets.

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

  Rushing through the data and ignoring adjustments.

  Fix: Tick off every adjustment in the question before totalling.

• Not deducting liquidation costs in liquidation value

  Students treat liquidation value as a simple sale of assets.

  Fix: Deduct liquidator's fees and winding-up expenses, and pay secured and preferential claims before equity.

• Forgetting preference capital and its arrears before dividing by equity shares

  Preference shares are viewed as part of share capital, not a prior claim.

  Fix: Deduct preference capital and any arrears of dividend that are payable, then divide.

• Ignoring the limitations when asked to comment

  Students give only the number.

  Fix: Add a line: the method ignores earning power and unrecorded intangibles, and fair values are subjective.

Worked examples