tejas.gaikwad.1044
Tejas Gaikwad
A measure of a company's valuation after liabilities, including off-balance sheet liabilities, and assets are adjusted to reflect true fair market value. The potential downside of using an adjusted book value is that a business could be worth more than its stated assets and/or liabilities because it fails to value intangible assets, account for discounts or factor in contingent liabilities. It is not often accepted as an accurate picture of a profitable company's operating value, however it can be a way of capturing potential equity available in a firm.
Sometimes the assets stated on the company's balance sheet can be adjusted to reflected fair market value -- that is, either their replacement value or their salvage value. This method of valuation may be appropriate for:-
a) Asset-intensive businesses with little value from goodwill or other intangible factors.
b) Not-for-profit organizations.
c) Businesses to be purchased by a competitor in the same industry.
But there are limitations. Often a business will be worth more than the sum of its tangible assets or fixed liabilities. This method fails to account for intangible assets (reputation, quality, service) or contingent liabilities.
Use of adjusted book value:-
Book value represents the historical cost of a company's assets in excess of its liabilities. This is the accountant's preferred method for valuing a corporation, familiar to the reader of annual reports and balance sheets. In computing adjusted book value, such intangible items as goodwill, patents and copyrights are often deducted from the net worth, and assets such as equipment, inventories, and real estate are adjusted to fair market value. This method is often considered appropriate for valuing real estate holding companies, investment companies and businesses that are anticipated to be liquidated, although Revenue Ruling 59-60 states that earnings are normally the most important criterion.
Accountants must record financial statements under strict regulations. This makes the true book value lower in many cases because accountants must take the historical cost of an asset and record it at the same cost as when purchased. An example of this would be if the company bought land and paid $1000 for the land 100 years ago, accountants must record the book value of the land as $1000 after all those years. The book value does not change even though the value of the land may have tripled, or more throughout the years. The true market value of the company would not be recognized until the asset was sold.
There are exactly dozens of methods a patron can use to allocate value or calculate worth to a company. Deciding which outward appearance of valuation method to employ involves several measures such as the firm category and accessibility of information.
The adjusted book value technique of valuation is most frequently used to allocate value to distressed companies in front of potential liquidation or companies that embrace tangible assets such as possessions or securities. Analysts might employ adjusted book value to conclude a bottom line price for a firm's value when anticipating bankruptcy or auction due to financial suffering.
Legal reception of book value:-
Although the adjusted book value method of valuing a company is relatively simple and may be used as a factor, it is seldom accepted as the true or realistic fair market value of a profitable operating company.
But if the company is unstable, showing a loss of earnings, and financially in trouble, the liquidation value may be a prima facie approximation of value. Baum v. Baum, 120 Ariz. 140, 584, P.2d 604 (1978); McCune v. McCune, 120 Ariz. 402, 586 P.2d 651 (1978).
In Ahlenius v. Bunn and Humphreys, Inc., 358 Ill. 155, 192 N.E. 824 (1934), the Illinois Supreme Court criticized the "book value" approach:
The value of shares of corporate stock has been held to mean not merely the market price, if the stock is traded in by the public, to determine which all the assets and liabilities of the corporation must be ascertained…Among the factors which have been considered in analogous cases are earning capacity...; the investment value of the stock which is largely determined by the rate of dividends, the regularity with which they have been paid, the possibility that they will be increased or diminished, the selling price of stocks of like character, the amount of preferred stock in comparison with the common stock, the size of the accumulated surplus applicable to dividends, the record of the corporation and its prospects for the future…and goodwill. Id. at 167-68, 192 N.E. at 829.
If book value is used, commentators point out that courts should be careful that adjustments are made to book entries to reflect current market values. See generally, B. Goldberg, Valuation of Divorce Assets, § 6.5 (1984).
Sometimes the assets stated on the company's balance sheet can be adjusted to reflected fair market value -- that is, either their replacement value or their salvage value. This method of valuation may be appropriate for:-
a) Asset-intensive businesses with little value from goodwill or other intangible factors.
b) Not-for-profit organizations.
c) Businesses to be purchased by a competitor in the same industry.
But there are limitations. Often a business will be worth more than the sum of its tangible assets or fixed liabilities. This method fails to account for intangible assets (reputation, quality, service) or contingent liabilities.
Use of adjusted book value:-
Book value represents the historical cost of a company's assets in excess of its liabilities. This is the accountant's preferred method for valuing a corporation, familiar to the reader of annual reports and balance sheets. In computing adjusted book value, such intangible items as goodwill, patents and copyrights are often deducted from the net worth, and assets such as equipment, inventories, and real estate are adjusted to fair market value. This method is often considered appropriate for valuing real estate holding companies, investment companies and businesses that are anticipated to be liquidated, although Revenue Ruling 59-60 states that earnings are normally the most important criterion.
Accountants must record financial statements under strict regulations. This makes the true book value lower in many cases because accountants must take the historical cost of an asset and record it at the same cost as when purchased. An example of this would be if the company bought land and paid $1000 for the land 100 years ago, accountants must record the book value of the land as $1000 after all those years. The book value does not change even though the value of the land may have tripled, or more throughout the years. The true market value of the company would not be recognized until the asset was sold.
There are exactly dozens of methods a patron can use to allocate value or calculate worth to a company. Deciding which outward appearance of valuation method to employ involves several measures such as the firm category and accessibility of information.
The adjusted book value technique of valuation is most frequently used to allocate value to distressed companies in front of potential liquidation or companies that embrace tangible assets such as possessions or securities. Analysts might employ adjusted book value to conclude a bottom line price for a firm's value when anticipating bankruptcy or auction due to financial suffering.
Legal reception of book value:-
Although the adjusted book value method of valuing a company is relatively simple and may be used as a factor, it is seldom accepted as the true or realistic fair market value of a profitable operating company.
But if the company is unstable, showing a loss of earnings, and financially in trouble, the liquidation value may be a prima facie approximation of value. Baum v. Baum, 120 Ariz. 140, 584, P.2d 604 (1978); McCune v. McCune, 120 Ariz. 402, 586 P.2d 651 (1978).
In Ahlenius v. Bunn and Humphreys, Inc., 358 Ill. 155, 192 N.E. 824 (1934), the Illinois Supreme Court criticized the "book value" approach:
The value of shares of corporate stock has been held to mean not merely the market price, if the stock is traded in by the public, to determine which all the assets and liabilities of the corporation must be ascertained…Among the factors which have been considered in analogous cases are earning capacity...; the investment value of the stock which is largely determined by the rate of dividends, the regularity with which they have been paid, the possibility that they will be increased or diminished, the selling price of stocks of like character, the amount of preferred stock in comparison with the common stock, the size of the accumulated surplus applicable to dividends, the record of the corporation and its prospects for the future…and goodwill. Id. at 167-68, 192 N.E. at 829.
If book value is used, commentators point out that courts should be careful that adjustments are made to book entries to reflect current market values. See generally, B. Goldberg, Valuation of Divorce Assets, § 6.5 (1984).