VCM

Asset Based Valuation

Asset has been defined by the industry as transactions that would yield future economic benefits as a result of past
transactions. Hence, the value of investment opportunities is highly dependent on the value that the asset will
generate from now until the future.

In practice, valuation is a sensitive and confidential activity in their portfolio management. Valuation should be kept
confidential to allow the company to negotiate a better position for them to acquire an opportunity.

● Green field investments are investments that started from scratch and the value shall be based on pure
estimates.
● Brown field investments are those already in the going concern state, as most businesses are in the
optimistic perspective that they will grow in the future. These investments are those opportunities that can be
either partially or fully operational and can be considered as going concern business opportunities
(GCBOs).

Going concern business opportunities are those businesses that have a long term to infinite operational period.
The risk indicators can be identified easily and can be quantified accordingly.

The Committee of Sporing Organization of the Treadway Commission (COSO) suggests that risk management
principles must be observed in doing business and determining its value.

Benefits of having a sound Enterprise-wide Risk Management

1. Increase the opportunities
2. Facilitate management and identification of the risk factors that affect the business
3. Identify or create cost-efficient opportunities
4. Manage performance variability
5. Improve management and distribution of resources across the enterprise
6. Make the business more resilient to abrupt changes

In asset-based valuation, familiarity with the generally accepted accounting principles is a key attribute for an analyst
to enable them to establish the value.

Asset-based valuation is more commonly used by analysts and valuators since the asset is the best representation
of what the company currently has less the non-equity claim against the assets.

Asset-based valuation methods normally observed by the practitioners:

Book Value Method

Book Value is defined as the value recorded in the accounting records of a company and highly dependent on the
value of the assets as declared in the audited financial statements.
IAS 1 Statement of Financial Position requires summary of the total value of asset, liabilities and equity of a firm.

Assets
Current Assets Non-Current Assets
● Those expected to be realized within ● Those benefits that can be realized
the company's operating cycle or in more than 12 months.
within 12 mos., or held primarily for
trading purposes.
Cash and cash equivalents may be
included only if it is not restricted.

Liabilities
Current Liabilities Non-Current Liabilities
● Those expected to be settled within ● Those liabilities which are due to be
the entity’s operating cycle, due to be settled longer than 12 months.
settled within 12 mos., held for the
purpose of trading.

In the Book Value Method, the value of the enterprise is based on the BV of the assets less all non-equity claims
against it.

Formula:

To illustrate, Grape and Vines Corp. in the Year 20xx presented their statement of financial position with the following
balances:
Current Assets Php 500,000,000
Non-Current Assets 1,000,000,000
Total Assets Php 1,500,000,000

Current Liabilities Php 200,000,000

Non-Current Liabilities 700,000,000
Total Liabilities Php 900,000,000

Outstanding shares is 1 Million.

Replacement Value Method

The National Association of Valuators and Analysts has defined the replacement cost as the cost of similar
assets that have the nearest equivalent value as of the valuation date.

Here, the value of the individual assets shall be adjusted to reflect the relative value or cost equivalent to
replace that asset.

The factors that can affect the replacement value of an asset:

● Age of the asset - It is important to know how old the asset for this to 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 assets - This is important for fixed assets particularly real property where assets of the
similar size will be compared.

● Competitive advantage of the asset - Assets which have distinct characteristics are hard to
replace. However, the characteristics and capabilities of the distinct asset might be found in similar,
separate assets.

The value of the equity using the replacement value method is computed using the formula:

To illustrate, following through the given information for Grapes and Vines Corp., suppose that 50% of the non-
current assets has an estimated replacement value of 150% of its recorded net book value while the remaining
half has estimated replacement value of 75% of their recorded net book value. With the given information, the
equity value is adjusted:

1. Calculate the replacement value of the affected items.

Since the values presented are the one presented in the statement of financial position, it is assumed that it is
the net book value of the non-current assets.

50% of Non-current Assets - 150% of the net book value

Non-current Assets Php 1,000,000,000
% of affected item 50%
50% of the Non-current Assets Php 500,000,000
Premium on Replacement 150%
Adjusted Non-Current Assets (A) Php 750,000,000

50% of Non-current Assets - 75% of the net book value

Non-current Assets Php 1,000,000,000
% of affected item 50%
50% of the Non-current Assets Php 500,000,000
Discount on Replacement 75%
Adjusted Non-Current Assets (B) Php 375,000,000

Total Adjusted Non-current Assets

Adjusted Non-Current Assets (A) Php 750,000,000
Adjusted Non-Current Assets (B) 375,000,000
Total Adjusted Non-Current Assets Php 1,125,000,000

2. Add back the unadjusted components

Total Adjusted Non-Current Assets Php 1,125,000,000

Add: Current Assets 500,000,000
Total Assets - Replacement Value Php 1,625,000,000

3. Apply the Replacement Value Formula

Reproduction Value Method

● The reproduction value method is utilised when no external information is available to determine
replacement costs for highly specialised assets.

● This method involves conducting reproduction cost analysis internally, which is particularly useful for
new businesses, ventures with specialised equipment, or firms heavily reliant on intangible assets.

● Limited comparators and benchmark information pose challenges to validating the calculated value.

● The process for determining equity value using the reproduction value method includes:

1. Conducting reproduction cost analysis on all assets.

2. Adjusting the book values to reproduction cost values, akin to replacement value adjustments.
3. Applying the replacement value formula using the figures calculated in the preceding steps.