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ACCA Applied Skills · Financial Management · Nature and purpose of the valuation of business and financial assets

Which of the following is a recognised limitation of using the net asset basis to value a going concern?

A key limitation is that the net asset basis often ignores unrecognised intangible assets and the business's future earning power. It values only recorded assets less liabilities, so it may understate a profitable going concern relying on brands, skills or know-how.

  1. AIt cannot be calculated for companies that pay dividends
  2. BIt requires an estimate of the cost of equity
  3. CIt often ignores unrecognised intangible assets and the earning power of the businessCorrect
  4. DIt always values the business at less than its liquidation value

Explanation

Asset-based values typically omit internally generated intangibles such as brands, know-how and workforce, and reflect no future earnings potential. It does not need a cost of equity, can be used for dividend-paying firms, and has no rule that it is below liquidation value.

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