1ON CONCEPTS AND METHODOLOGIES 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. The value should also include all cash flows that will be generated until the disposal of the asset. 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. Since the value of assets will depend on its ability to generate economic benefits, it is more challenging to determine the value of a green field investment since value shall be based on pure estimates compared to brown field investment. Green field investments are investments that started from scratch while brown field investments are those opportunities that can be either partially or fully operational. Brown field investments are these already in the going concern state, as most businesses are in the optimistic perspective that they will grow in the future. Therefore, they can be considered as going concern business opportunities (GCBOs). Going concem business opportunities are those businesses that has a long term to infinite operational period. The advantage of GCBOs is that we already have a reference for their performance - from its historical performance or an existing business with a similar nature. With this, the risk indicators can be identified easily and can be quantified accordingly. The Committee of Sponsoring Organization of the Treadway Commission (COSO) suggests that risk management principles must be observed in doing businesses and determining its value. It was noted in their report that the benefits of having a sound Enterprise-wide Risk Management allows the company to: 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; and 6. make the business more resilient to abrupt changes. The importance of identifying risks is to enable investors to quantify the impact of the risk and/or the cost of managing these risks. Theoretically, asset value is dependent on the economic benefits (i.e. cash flows) it gives.WALUATION CONCEPTS AND METHODOLOGIES "= entire company is driven by its asset base, the value of the company t attributed to the value of its assets. The advantage of using this s it enables the analyst to validate the firm value through the value s. Some approaches may rely on the ability of the asset to generate enues. However, this only focuses on the current and historical value sets and will disregard the value it can generate in the future and ly represent the true value of the assets. Sased valuation, familiarity with the generally accepted accounting 'S a key attribute for an analyst to enable them to establish the 'sset-based valuation can be used if the basis of the value is y established and complete. Information required for asset-based ude total value of the assets, the financing structure (i.e. total s and total equity), classes of equity and other sources of funding. = popular methods used to determine the value using assets as its = (1) book value method; (2) replacement value method; (3) n value method; and (4) liquidation value method. “See Value Method can be defined as the value recorded in the accounting records ny. The book value is highly dependent on the value of the assets in the audited financial statements, particularly the balance sheet ent of financial position. International Accounting Standard No. it the statement of financial position to summarize the total value ts, liabilities and equity of a firm. are required to be categorized into current and non-current rent assets are those expected to be realized within the | seeery’s normal operating cycle, expected to be realized within 12 months Se transactions were reported, or held primarily for the purpose of Cash and cash equivalents may also be included only if it is not On the other hand, assets wherein benefits can be realized in more “2 months are known as non-current assets. ‘er hand, liabilities is also categorized as current and non-current. abilities are expected to be seitled within the entity's normal cycle, due to be settled within 12 months, held for the purpose of if the company does not have ability to settle beyond 12 months. erent liabilities are liabilities which are due to be settled longer than 12 (mersVALUATION CONCEPTS AND METHODOLOGIES. in the book value method, the value of the enterprise is based on the book value of the assets less all non-equity claims against it. Hence, the formula is as follows: Total Assets — Total Liabilities B ft Se MeL POP Ris gets amar Gf Outstanding Shares To illustrate, Grape and Vines Corp. in the Year 20xx presented their statement of financial position with the following balances: Current Assets is Php500 Million; Non-current Assets is Php1 Billion; Current Liabilities is Php200 Million; Non-current Liabilities is Php700 Million and the Outstanding shares is 1 Million. With the given information, the net book value of the assets is Php600 per share computed as follows: Current Assets Php 500,000,000 Non-current Assets 1,900,000,000 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 Php1,500,000,000 — Php900,000,000 Vv ts = NBVigh sstete 1,000,000 shares Php600 Million REY A ee ore SnaTES NBY of Assets = Php 600 / share The advantage of using book value method is that it provides a more transparent view on firm value and is more verifiable since this is based in the figures reflected in the financial statements. However, the book value only reflects historical value (only based on what is recorded in the accounting books) and might not reflect the real value of the business now.EU ie Ree ea Pate Sek a ‘See'ecement Value Method "Ye the book value method offers convenient determination of the company = ‘the limitation of the book value method is that it does not account for “e ©! value of the net assets now that would result for overage or _ S@erststement of value of the net assets recorded in the books. The National _ Seeecetion of Valuators and Analysts has defined the replacement cost as “© ©os of similar assets that have the nearest equivalent value as of the Gon date. er the replacement value method, the value of the individual assets shall "© s@usted to reflect the relative value or cost equivalent to replace that The following are the factors that can affect the replacement value of asset » Age of the asset - it is important to know how old the asset is. This will enable the valuator to determine the costs related in order to upkeep 2 similarly aged asset and whether assets with similar engineering cesign are still available in the market. * Size of the assets - This is important for fixed assets particularly real croperty where assets of the similar size will be compared. Some analysts find that the assets can produce the same volume for the assets of the same size. «= 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. Some valuators combine the value of the similar, separate assets that can perform the function of the distinct asset being valued. = specific discipline in determining the replacement value. Appraisers ®eir own technique to determine the replacement value. insurance sens use the replacement value in determining the appropriate € premium to be charged to their clients. For instance, a company 2 building with a book value of Php 5 Million, and the estimated sement cost is Php6 Million. The insurer can offer a premium to cover surance at Php6 Million. This is the most prudent approach for a “ Since the remaining 20% or Php 200 Million is goodwill and already in its proper value, it will not be adjusted 2. Adjust the book value to reproduction costs Non-current Assets Php 800,000,000 Reproduction Cost Estimate % 90% _ Reproduction Cost Php 720,000,000 Non-Current Assets — Reproduction Cost Php 720,000,000 Add: Goodwill _____200,000,000 Total Non-current Assets Php 920,000,000 Add: Current Assets 500,000,000 Total Assets Php1,420,000,000 3. Apply the replacement value formula using the figures calculated in the preceding step. Php1,420,000,000 — Php900,000,000 1,000,000 shares Reproduction Value =Eee aera Php520,000,000 i Bip EOE Reproduction Value "7 05 900 shares Reproduction Value = Php 520 / share Value Method son value method is an equity valuation approach that considers the value as the value of the asset. This assumes that the reasonable ‘or the company to be purchased is the amount which the investors will = the end of its life or the value of the when it is terminated. While the = provides is the most conservative, the limitation of this approach is ‘Pe “uture value is not fully incorporated in the calculated equity value. “ ethod will be further discussed in the next chapter.[RRR rer reer reece revere 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 are: book value method, replacement value method, reproduction value method, and liquidation method. Book Value method uses the asset values as presented on the statement of financial position less the liabilities. Replacement Value method adjusts the assets values as presented on the statement of financial position less liabilities. The adjustment shail be geared towards presenting it based on the replacement value. Reproduction Value method adjusts the asset values and will consider the value when the asset is rebuilt. Liquidation Value method presents the value based on its salvage value.