Adjusted net asset method tangible asset example

The asset accumulation method and the adjusted net asset method are both generally accepted business valuation methods of the asset-based business valuation approach. This is an example resulting in the recognition of a revaluation to fair value of a tangible asset. Other examples are intangible assets and negative goodwill.

The valuation expert is again retained to estimate the value of 100 percent of the owners equity of the subject company, White Client Company (“White”), as of December 31, 2016.

Again, the valuation assignment calls for a fair market value standard of value and a marketable, controlling ownership interest level of value. White has the same GAAP-based balance sheet as did the hypothetical Red Client Company. Again, all financial data are presented in $000s.

Again, the valuation expert decides to apply the asset-based approach and the adjusted net asset value method to value the equity. The valuation expert decides to use the capitalized excess earnings method analysis to measure the appropriate total valuation adjustment to the GAAP-based balance sheet.

The valuation expert performs a due diligence analysis of the company and estimates that White will generate $9,000 of EBIT next year.

In this valuation, the valuation expert decides to use EBIT as the appropriate income metric to measure any excess earnings. And, the valuation expert performs a WACC analysis and concludes that 15 percent is the appropriate rate of return on the White assets.

Finally, the valuation expert again concludes a zero expected long-term growth rate in any company excess earnings. Therefore, the valuation expert concluded a 15 percent direct capitalization rate for use in the capitalized excess earnings method analysis.

In the case of White, the valuation expert is able to revalue certain of the assets that are already recorded on the balance sheet. Let’s assume that the valuation expert perform a market approach analysis to value the inventory.

The valuation expert estimated the expected selling price of the inventory less the corresponding expected selling expense. The valuation expert concluded a $6,000 fair market value for the inventory.

White management provided the valuation expert with contemporaneous appraisals of the company property, plant, and equipment. Based on a market approach (and a sales comparison method analysis), the fair market value of the White land was $12,000. Based on a cost approach (and an RCNLD method analysis), the fair market value of the White building was $14,000 and the fair market value of the White equipment was $24,000.

All of these assets (including the inventory) were appraised based on a value in continued use premise of value.

Since the valuation expert had individually revalued account balances in this fact set example, the valuation expert could have applied different required rates of return to each asset category.

For example, the valuation expert could have applied a lower (than 15 percent) rate of return to the inventory and tangible assets. Then the valuation expert would have applied a higher (than 15 percent) capitalization rate as part of the goodwill-related valuation. Using such a procedure, the valuation expert would have to ensure that the White weighted average return on assets (“WARA”) equals the White WACC in the capitalized excess earnings method analysis.

To maintain the simplicity of this illustrative example, the valuation expert consistently used the White 15 percent WACC as the required rate of return on all of the asset categories in this capitalized excess earnings method analysis.

Since the valuation expert received or performed current valuations of certain of the asset accounts, the valuation expert used these valuations in the adjusted net asset value method analysis. Let’s assume that the valuation expert did not have valuations for any of the intangible assets.

Based on a White historical cost balance sheet that was equal to the Red historical cost balance sheet and based on the current values for the White inventory and tangible assets, the valuation expert performed the capitalized excess earnings method analysis summarized in Exhibit 4.

Finally, the valuation expert prepared the adjusted net asset value method valuation-based balance sheet as of the December 31, 2016, valuation date.

The valuation expert adjusted the GAAP-based balance sheet for both:

  1. the results of the separately valued individual asset accounts and
  2. the conclusions of the capitalized excess earnings method analysis.

The White adjusted net asset value balance sheet is presented in Exhibit 5. All financial data are presented in $000s.

Based on the simplified fact set in this illustrative example, the valuation expert performed the asset-based approach and the adjusted net asset value method to value the White total equity.

The valuation expert:

  1. used current values for several White asset categories and
  2. applied the capitalized excess earnings method analysis to collectively revalue all other White tangible assets and intangible assets.

Based on this capitalized excess earnings method analysis, the valuation expert concluded a $5,000 conclusion for the aggregate intangible value in the nature of goodwill.

And, based on the adjusted net asset value method analysis, the valuation expert concluded a $36,000 value for 100 percent of the White owners’ equity as of December 31, 2016.

Adjusted net asset method tangible asset example

Adjusted net asset method tangible asset example

Adjusted net asset method tangible asset example

Adjusted net asset method tangible asset example

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