Valuation

• IAS 1 requires that the statement of financial position to summarize the total value of its assets, liabilities and equity of a firm.
• Assets are required to be categorized into current and non-current assets.
• Replacement cost is the cost of similar assets that have the nearest equivalent value as of the valuation date.
• Steps in determining the equity value using the reproduction value method include conducting reproduction cost analysis on all assets, adjusting the book values to reproduction costs values, and applying the replacement value formula using the figures calculated in the preceding steps.
• The liquidity value method values the asset based on its salvage value.
• The reproduction value method is useful when calculating the value of new or start-up businesses, ventures that use specialized equipment or assets, firms that are heavily dependent on intangible assets and those with limited market information.
• The challenge of reproduction value method is the ability to validate the reasonableness of the value calculated since there are only limited sources of comparators and benchmark information that can be used.
• Reproduction value is an estimate of cost of reproducing, creating, developing or manufacturing a similar asset.
• Factors that can affect the replacement value of an asset include age of the asset, size of the asset, and competitive advantage of the asset.
• Current assets are those expected to be realized within the company’s normal operating cycle, expected to be realized within 12 months after these transactions were reported, or held primarily for the purpose of trading.
• The replacement value method adjusts the value of individual assets to reflect the relative value or cost equivalent to replace the asset.
• The reproduction value method is also a convenient approach.
• The net book value of assets is calculated as (total assets – total liabilities)/numbers of outstanding shares.
• Current liabilities are expected to be settled within the entity’s normal operating cycle, due to be settled within 12 months, held for the purpose of trading or if the company does not have the ability to settle beyond 12 months.
• The reproduction value method requires reproduction cost analysis which is internally done by companies especially if the assets are internally developed.
• The National Association of Valuators and Analysts defines the replacement cost as the cost of similar assets that have the nearest equivalent value as of the valuation date.
• Replacement value per share is calculated as (net book value ± replacement adjustment)/outstanding shares.
• Insurance companies use the replacement value in determining the appropriate insurance premium to be charged to their clients.
• The book value method values the enterprise based on the book value of the assets less all non-equity claims against it.
• Non-current liabilities are liabilities which are due to be settled longer than 12 months.
• The reproduction value method is used when there is no external information available that can serve as basis for replacement cost of assets that are highly specialized in nature.
• Cash and cash equivalents are current if it is not restricted.
• Non-current assets are assets wherein benefits can be realized in more than 12 months.
• Liabilities are categorized as current and non-current.
• Age of the asset – this will enable the valuator to determine the costs related in order to upkeep a similarly aged asset and whether assets with similar engineering design are still available in the market.
• Size of the asset – this is important for fixed assets particularly real property where assets of the similar size will be compared.
• Competitive advantage of the asset – assets having distinct characteristics are hard to replace.