CHAPTER 2 ASSET BASED VALUATION METHODS USED IN DETERMINING VALUE USING

ASSETS AS BASES:
Asset 1. Book Value Method - the value of the enterprise is
- Transactions that would yield future economic based on the book value of the assets less all
benefits as a result of past transactions non-equity claims against it.

Value of an Asset
- Depend on its ability to generate economic benefits

Green field investment

- Investments that started from scratch
Book value - the value recorded in the
Brown field investment accounting records of a company
- Opportunities that can be either partially or fully
operational Current Assets - those expected to be
- Those already in the going concern state, as most realized within the company’s normal operating
businesses are in the optimistic perspective that cycle, expected to be realized within 12 months
they will grow in the future after these transactions were reported or held
- They can be considered as Going concern business primarily for the purpose of trading
opportunities (GCBOs)
Non-Current Assets - benefits can be
Going Concern Business Opportunities (GCBOs) realized in more than 12 months
- Those businesses that has a long term to infinite
operational period Current Liabilities - expected to be
settled within the entity’s normal operating cycle,
Advantage of GCBOs due to be settled within 12 months, held for the
- Already have reference for their performance from purpose of trading
historical performance or an existing business with
a similar nature Non-Current Liabilities - due to be settled
- The risk indicator can be identified easily and can longer than 12 months
be quantified accordingly Advantage of using book value method:
- Provides a more transparent view on the
Committee of Sponsoring Organization of the Treadway firm value and is more verifiable since this
Commission (COSO) is based in the figures reflected in the FS
- suggests that risk management principles must be Limitations of book value method:
observed in doing business and determining its - Reflects historical value and might not
value reflect the real value of the business now.
- Noted the benefits of having a sound - Does not account for the full value of the et
Enterprise-wide Risk Management which allows the assets now that would result for overage of
firms to: understatement of value of the net assets
● Increase the opportunities recorded in books
● Facilitate management and identification of
the risk factors that affect the business 2. Replacement Value Method - the value of the
● Identify or create cost-efficient individual assets shall be adjusted to reflect the
opportunities relative value or cost equivalent to replace that
● Manage performance variability asset
● Improve management and distribution of Replacement Cost - the cost of similar
resources across the enterprise assets that have the nearest equivalent value as of
● Make the business more resilient to abrupt the valuation date.
changes
Factors that can affect the replacement value of
Asset based Valuation an asset:
- Familiarity with the GAAP is a key attribute for 1. Age of the Asset
analyst to enable them to establish the value 2. Size of the Asset
- Used if the basis of the value is concretely 3. Competitive Advantage of the Asset
established and completed

Information required for Asset based Valuation

● Total value of the assets
● The financing structure (total liabilities and total
equity)
● Classes of equity
● Other sources of funding 3. Reproduction Value Method - requires
reproduction cost analysis which is internally done
 by companies especially if the assets are internally
developed.

Reproduction Value - an estimate of cost

of reproducing, creating, developing or
manufacturing a similar asset

Steps in determining the equity value:

1. Conduct reproduction cost analysis on all
assets
2. Adjust the book values to reproduction
cost values
3. Apply the replacement value formula using
the figures calculated in the previous step

4. Liquidation Value Method

- An equity valuation approach that
considers the salvage value as the value
of the asset