ACCTG 326N

ASSET-BASED
APPROACH
Daniel, Norhaina M.
Panegas, Sittie Hyfa S.
 ASSET-BASED APPROACH

Definition

• used to value overall business during:

a) sale/purchase
b) merger/acquisition
c) liquidation

• most commonly used approach by analyst and

valuators since asset is the best representation of
what the company currently has less the non-equity
claims against the asset.

• Net asset = Net book value

 ASSET-BASED APPROACH

ADVANTAGE DISADVANTAGE
Allow analysts to validate firms value Reflects historical value
through the value of its assets.
 ASSET-BASED APPROACH

GREEN FIELD BROWN FIELD

investment investment

• Starts from scratch • Partially/ fully operational

• Based on estimates • Already in Going Concern Business
Opportunities (GCBO’s)
ASSET-BASED APPROACH

ENTERPRISE-WIDE RISK
MANAGEMENT
BENEFITS:
• Increase Opportunities
• Facilitate management and identification of
risk factors that affect the business
• Identify or create cost-efficient opportunities
• Manage performance viability
• Improve management and distribution of
resources across the enterprise
• Make the business more resilient to abrupt
changes.
 4 METHODS

Book Value Method Replacement Value Method

Reproduction Value Method Liquidation Value Method

 BOOK VALUE METHOD

BOOK VALUE
- value recorded in the accounting records.

NET BOOK VALUE

- value of the enterprise based on the book value of the assets less all non- equity
claims against it.

TOTAL ASSETS - TOTAL LIABILITIES

NET BOOK VALUE =
# of OS / WA of OS
 BVM – PROBLEM #1

Vines and Grapes Corp in

the year 2020 presented their Total Asset - Total Liabilities
statement of financial position with
Net Book Value of Asset =
# of OS / Wan of OS
the following balances:

Current Asset P 500 M

P1,500,000,000 - P900,000,000
Non-current Asset 1B
1,000,000 shares
Current Liabilities 200 M
Non-current liabilities 700 M
P600,000,000
Outstanding Shares 1M 1,000,000 shares

Compute for the net book value

of the asset of P600 per share
Vines and Grapes Corp.
 BVM – PROBLEM #2
The Balance Sheet of Piolo Company as of December 31 is shown below:
Assets 2019 2020
Cash
Marketable Securities
₱ 45,000 ₱
60,000
60,000
85,000
REQ. 1
Accounts Receivable 60,000 80,000
Inventory 70,000 100,000 Total Asset -2019 ₱ 490,000
PPE-net 300,000 280,000
TOTAL ASSETS ₱ 490,000 ₱ 545,000 Total liabilities -2019 170,000
Book Value -2019 ₱ 320,000
Liabilities and Shareholder's Equity
Accounts payable ₱ 35,000 ₱ 45,000
Short term notes payable 50,000 50,000
Bonds payable
Ordinary shares
85,000
200,000
75,000
225,000
REQ. 2
Retained Earnings 120,000 150,000
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY ₱ 490,000 ₱ 545,000
Book value -2019 ₱ 320,000
Ordinary shares has a par value of ₱1.00 per share. In April 1 2020, Piolo company
issued additional shares as part of the funding plan.
# of OS / WA of OS -2019 200,000
Compute for the following:
Book value per share -2019 ₱ 1.60
1. Book value as of December 31, 2019
2. Book value per share as of December 31 2019
3. Book value as of December 31 2020
4. Book value per share as of December 31 2020
 BVM – PROBLEM #2
The Balance Sheet of Piolo Company as of December 31 is shown below:
Assets 2019 2020
Cash
Marketable Securities
₱ 45,000 ₱
60,000
60,000
85,000
REQ. 3
Accounts Receivable 60,000 80,000
Inventory
PPE-net
70,000
300,000
100,000
280,000
Total Asset -2020 ₱ 545,000
TOTAL ASSETS ₱ 490,000 ₱ 545,000 Total liabilities -2020 170,000
Liabilities and Shareholder's Equity Book Value -2020 ₱ 375,000
Accounts payable ₱ 35,000 ₱ 45,000
Short term notes payable 50,000 50,000
Bonds payable 85,000 75,000
Ordinary shares
Retained Earnings
200,000
120,000
225,000
150,000
REQ. 4
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY ₱ 490,000 ₱ 545,000

Ordinary shares has a par value of ₱1.00 per share. In April 1 2020, Piolo company
Book value -2020 ₱ 375,000
issued additional shares as part of the funding plan. # of OS / WA of OS -2020 218,750
Book value per share -2020 ₱ 1.71
Compute for the following:
1. Book value as of December 31, 2019
2. Book value per share as of December 31 2019
3. Book value as of December 31 2020
4. Book value per share as of December 31 2020
 BVM – PROBLEM #3

Magnolia Company reported the following informations:

Asset turnover 3x Asset turnover = Net sales / Total Assets

Sales ₱ 15,000,000 3 = P15,000,000/Total Assets
Debt ratio 42%
P15,000,000 = ( 3 )Total Asset
3 3
Magnolia company also reported 500,000 ordinary P5,000,000 = Total Assets
shares at the beginning of 2020. In the beginning of
the second quarter, convertible bondholders opted
to exercise their option to convert to shares Debt ratio = Total Liabilities / Total Assets
resulting to additional 100,000 shares. In October 1, 42% = Total Liabilities/P5,000,000
Magnolia bought back 50,000 shares as they have
spare cash. Asset turnover only consider asset = P5,000,000 (42%)
balance as of December 31. What is the book value Total liabilities = P2,100,000
per share of Magnolia Company
 BVM – PROBLEM #3

Magnolia Company reported the following informations:

Shares Fraction WA of OS
Asset turnover 3x Jan-March 500,000 3/12 125,000
Sales ₱ 15,000,000 April-Sept 600,000 6/12 300,000
Debt ratio 42% October-Dec 550,000 3/12 137,500
562,500

Magnolia company also reported 500,000 ordinary

NBV of asset = Total Asset - Total liabilities
shares at the beginning of 2020. In the beginning of WA of OS
the second quarter, convertible bondholders opted
to exercise their option to convert to shares P5,000,000-P2,100,000
resulting to additional 100,000 shares. In October 1,
Magnolia bought back 50,000 shares as they have 562500 shares
spare cash. Asset turnover only consider asset
balance as of December 31. What is the book value P5.15…/5.16 per share
per share of Magnolia Company
 The method is based on the
principle that a buyer will not
REPLACEMENT VALUE METHOD
pay more for an asset—and a
seller will not accept less—
than the price of a similar asset.
Replacement cost
– is the cost of similar assets that have the nearest equivalent value as
of the valuation date.

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

• Age of the asset

• Size of the assets TOTAL REPLACEMENT VALUE
REPLACEMENT
• Competitive VALUE PER SHARE =
advantage of OUTSTANDING SHARES
the asset
 Replacement – PROBLEM 1

To illustrate, Grape and Vines Corp.

in the Year 20xx presented their
statement of financial position with
the following balances:
1. Calculate the replacement value of
Current assets ₱500,000,000 affected items.
Noncurrent assets 1,000,000,000
Current liabilities 200,000,000
Noncurrent liabilities 700,000,000 50% of non-current assets – 150% of the net book value
Outstanding shares 1,000,000 Non-Current assets ₱1,000,000,000
To illustrate, following through the % of affected item 50%
given information for Grapes and Vines Corp., 50% of the non-current assets ₱500,000,000
suppose that 50% of the non-current assets
has an estimated replacement value of 150%
Premium on replacement 150%
of its recorded net book value while the Adjusted non-current assets (A) ₱750,000,000
remaining half has estimated replacement
value of 75% of their recorded net book value.
With the given information, the equity value is
adjusted:
 Replacement – PROBLEM 1

To illustrate, Grape and Vines Corp.

in the Year 20xx presented their
statement of financial position with 50% of non-current assets is 75% of the net book value
the following balances: Non-Current assets ₱1,000,000,000
% of affected item 50%
Current assets ₱500,000,000 50% of the non-current assets ₱500,000,000
Noncurrent assets 1,000,000,000
Current liabilities 200,000,000
Discount on replacement 75%
Noncurrent liabilities 700,000,000 Adjusted non-current assets (B) ₱375,000,000
Outstanding shares 1,000,000

To illustrate, following through the Total adjusted non-current assets

given information for Grapes and Vines Corp.,
suppose that 50% of the non-current assets Adjusted non-current assets (A) ₱750,000,000
has an estimated replacement value of 150% Adjusted non-current assets (B) 375,000,000
of its recorded net book value while the Total adjusted non-current assets ₱1,125,000,000
remaining half has estimated replacement
value of 75% of their recorded net book value.
With the given information, the equity value is
adjusted:
 Replacement – PROBLEM 1

To illustrate, Grape and Vines Corp.

in the Year 20xx presented their
statement of financial position with
the following balances: 2. Add back the unadjusted components
Total adjusted non-current assets ₱1,125,000,000
Current assets ₱500,000,000
Noncurrent assets 1,000,000,000 Add: Current assets 500,000,000
Current liabilities 200,000,000 Total assets–replacement value ₱1,625,000,000
Noncurrent liabilities 700,000,000
Outstanding shares 1,000,000
3. Apply the Replacement Value Formula
To illustrate, following through the Replacement Value = ₱ 1,625,000,00 – ₱900,000,000
given information for Grapes and Vines Corp., 1,000,000 shares
suppose that 50% of the non-current assets
has an estimated replacement value of 150%
₱725,000,000 Replacement Value
of its recorded net book value while the 1,000,000
remaining half has estimated replacement Replacement Value per share = ₱ 725 per share
value of 75% of their recorded net book value.
With the given information, the equity value is
adjusted:
 Replacement – PROBLEM 2

The balance sheet of PIOLO Company is presented below:

Assets 2020
₱160,000
REQ. 1
Cash
Trade receivables 580,000
Inventory 180,000
Property, plant, and equipment (net) 2,350,000
Total assets

Liabilities and Shareholder's Equity

₱3,270,000
Total Assets ₱3,270,000
Accounts payable
Long-term bonds payable
420,000
900,000 Less: Total liabilities 1,320,000
Ordinary shares 1,500,000
Retained earnings
Total liabilities and shareholders' equity
450,000
₱3,270,000
Book Value ₱1,950,000
The owners of PIOLO Company is looking at how much they
can sell the company. They are assessing how much is the REQ. 2
range of the firm value based on company assets. A third-party
appraisal was made for property, plant, and equipment which
resulted with the following findings: property and buildings with Book value Replacement value
book value of P1,000,000 has market value of P1,500,000

The remaining portion is for equipment which was deemed can

Property and buildings ₱1,000,000 ₱1,500,000
be replaced at 80% of its book value. Other assets and liabilities
approximate their replacement values.
Equipment 1,350,000 1,080,000
Compute for the following:
Replacement cost - PPE ₱2,350,000 ₱2,580,000
1. Book value of PIOLO Company
2. Replacement cost of property, plant and equipment
3. Replacement value of PIOLO Company
 Replacement – PROBLEM 2

The balance sheet of PIOLO Company is presented below:

Assets 2020
Cash
Trade receivables
₱160,000
580,000 REQ. 3
Inventory 180,000
Property, plant, and equipment (net) 2,350,000
Total assets ₱3,270,000

Liabilities and Shareholder's Equity

PPE - replacement cost ₱2,580,000
Accounts payable 420,000
Long-term bonds payable 900,000 Other assets replacement value 920,000
Ordinary shares 1,500,000
Retained earnings
Total liabilities and shareholders' equity
450,000
₱3,270,000
Replacement value - assets ₱3,500,000
The owners of PIOLO Company is looking at how much they
can sell the company. They are assessing how much is the
Total Liabilities 1,320,000
range of the firm value based on company assets. A third-party
appraisal was made for property, plant, and equipment which Replacement value ₱2,180,000
resulted with the following findings: property and buildings with
book value of P1,000,000 has market value of P1,500,000

The remaining portion is for equipment which was deemed can

be replaced at 80% of its book value. Other assets and liabilities
Ordinary shares has a par value of ₱1.00 per share.
approximate their replacement values. In April 1 2020, Piolo company
Compute for the following:
1. Book value of PIOLO Company
2. Replacement cost of property, plant and equipment
3. Replacement value of PIOLO Company
 REPRODUCTION VALUE METHOD

Reproduction value
- is an estimate of cost of reproducing,
creating, developing, or manufacturing a
similar asset.
REPRODUCTION VALUE
Steps in determining the equity value using PER SHARE =
the reproduction value method are as follows:
• Conduct reproduction costs analysis on TOTAL REPRODUCTION VALUE
all assets.
• Adjust the book values to reproduction
OUTSTANDING
costs values (similar as replacement
SHARES
value).
• Apply the replacement value formula
using the figures calculated in the
preceding step.
 Reproduction – PROBLEM 1

To illustrate, Grape and Vines Corp.

in the Year 20xx presented their
statement of financial position with
the following balances:
1. Conduct reproduction cost analysis to all assets.
Current assets ₱500,000,000
Noncurrent assets 1,000,000,000 80% of the Total Noncurrent Assets if reproduced is
Current liabilities 200,000,000 equal to 90% of its value
Noncurrent liabilities 700,000,000
Noncurrent assets ₱1,000,000,000
Outstanding shares 1,000,000
% of affected item 80%
To illustrate using the information of ₱800,000,000
Grapes and Vines Corp., supposed
that it was noted that the 80% of the > Since the remaining 20% or ₱200,000,000 is goodwill and
total noncurrent assets are cheaper already in its proper value, it will not be adjusted.
by 90% of the book value when
reproduced. 20% of the total noncurrent
assets are comprised of goodwill which
upon testing was proven to be valued correctly.
correctly.
 Reproduction – PROBLEM 1

To illustrate, Grape and Vines Corp.

in the Year 20xx presented their
statement of financial position with
2. Adjust the book value to reproduction costs.
the following balances:

Current assets ₱500,000,000 Noncurrent Assets ₱800,000,000

Noncurrent assets 1,000,000,000
Current liabilities 200,000,000
Reproduction Cost Estimate % 90%
Noncurrent liabilities 700,000,000 Reproduction Cost ₱720,000,000
Outstanding shares 1,000,000

To illustrate using the information of Noncurrent assets – reproduction cost ₱720,000,000

Grapes and Vines Corp., supposed Add: Goodwill 200,000,000
that it was noted that the 80% of the
total noncurrent assets are cheaper
Total noncurrent assets ₱920,000,000
by 90% of the book value when Add: Current assets 500,000,000
reproduced. 20% of the total noncurrent Total Assets ₱1,420,000,000
assets are comprised of goodwill which
upon testing was proven to be valued correctly.
correctly.
 Reproduction – PROBLEM 1

To illustrate, Grape and Vines Corp.

in the Year 20xx presented their
statement of financial position with
the following balances:
3. Apply the Replacement Value Formula
Current assets ₱500,000,000
Noncurrent assets 1,000,000,000 using the figures calculated in the preceding step.
Current liabilities 200,000,000
Noncurrent liabilities 700,000,000
Outstanding shares 1,000,000
Reproduction Value = ₱ 1,420,000,00 – ₱900,000,000
1,000,000 shares
To illustrate using the information of ₱520,000,000 Reproduction Value
Grapes and Vines Corp., supposed
that it was noted that the 80% of the 1,000,000
total noncurrent assets are cheaper Reproduction Value per share = ₱520
by 90% of the book value when
reproduced. 20% of the total noncurrent
assets are comprised of goodwill which
upon testing was proven to be valued correctly.
correctly.
 Reproduction – PROBLEM 2

The balance sheet of PIOLO Company is presented below:

Assets 2020

REQ. 1
Cash ₱300,000
Trade receivables 700,000
Equipment 1,150,000
Intangible assets 400,000
Total assets ₱2,550,000 Total Assets ₱2,550,000
Liabilities and Shareholder's Equity
Accounts payable 200,000 Less: Total liabilities 400,000
Short-term notes payable 200,000
Ordinary shares
Retained earnings
2,000,000
150,000
Book Value ₱2,150,000
Total liabilities and shareholders' equity ₱2,550,000

The intangible assets - a patent to a new auditory technology - is

self-developed three years ago. An investor is looking at buying the company
REQ. 2
and PIOLO Company would like to give an initial quotation. Since the
technology is unique and does not have any comparables, the software
development team quoted that the cost of reproducing the intangible assets Intangible Assets - Book value 400,000
is at 120% of its net asset cost.

Compute for the following:

Reproduction cost % 120%
1. Book value of PIOLO Company
2. Reproduction cost of intangible assets Intangible Assets - reproduction cost ₱480,000
3. Reproduction value of PIOLO Company
 Reproduction – PROBLEM 2

The balance sheet of PIOLO Company is presented below:

Assets 2020

REQ. 3
Cash ₱300,000
Trade receivables 700,000
Equipment 1,150,000
Intangible assets 400,000
Total assets ₱2,550,000 Intangible Assets - reproduction cost ₱480,000
Liabilities and Shareholder's Equity Other assets reproduction value 2,150,000
Accounts payable
Short-term notes payable
200,000
200,000
Reproduction value - assets ₱2,630,000
Ordinary shares 2,000,000 Total Liabilities 400,000
Retained earnings 150,000
Total liabilities and shareholders' equity ₱2,550,000 Reproduction value ₱2,230,000
The intangible assets - a patent to a new auditory technology - is
self-developed three years ago. An investor is looking at buying the company
and PIOLO Company would like to give an initial quotation. Since the
technology is unique and does not have any comparables, the software
development team quoted that the cost of reproducing the intangible assets
Ordinary shares has a par value of ₱1.00 per
is at 120% of its net asset cost.
share. In April 1 2020, Piolo company
Compute for the following:
1. Book value of PIOLO Company
2. Reproduction cost of intangible assets
3. Reproduction value of PIOLO Company
 LIQUIDATION VALUE METHOD

➢ Also known as the net asset value

➢ considers the salvage value as the value of
the asset.
➢ value of the company if it were dissolved
LIQUIDATION VALUE PER
and its assets are sold individually.
SHARE =
➢ represents the net amount that can be
gathered if the business is shutdown, and TOTAL LIQUIDATION VALUE
its assets are sold piecemeal.
OUTSTANDING
➢ Situations to recognize LVM: SHARES
o Business failures
o Corporate or project life end
o Depletion of scarce resources
 LVM – PROBLEM 1

At year end, PIOLO Company balance

sheet showed total assets of
P50,000,000, total liabilities of P30,000,000,
and 500,000 shares of ordinary shares
outstanding. If PIOLO could sell its assets
for P40,000,000, PIOLO liquidation value per Book value Fair value
share of ordinary share is.. Assets ₱50,000,000 ₱40,000,000
Liabilities 30,000,000 -
Liquidation Value = ₱ 40,000,00 – ₱30,000,000
1,000,000 shares
₱10,000,000 Liquidation value
500,000
Liquidation value per share = P 20 per share
 LVM – PROBLEM 2

PIOLO Company reported the following balances in its

books. PIOLO Co. has 250,000 outstanding shares
If assets will be sold, they will only realize the amount
Assets 2020 based on the table below.
Cash ₱100,000
Accounts receivables, net 800,000 To compute for the adjusted value of the assets, the
Inventories 3,500,000 current book values should be multiplied by the assumed
Prepaid expenses 100,000
Property, Plant and Equipment, net 4,500,000
realizable value if they are liquidated.
Total assets ₱9,000,000
Asset Value at
Liabilities Cash 100%
Notes payable 1,200,000
Other liabilities 800,000
AR, net 85%
Total liabilities ₱2,000,000 Inventories 60%
Prepaid expenses 25%
PIOLO Co. is undergoing financial problems and PPE, net 60%
management would like to assess the liquidation value
Total Assets
as part of their strategy formulation.
 LVM – PROBLEM 2

If assets will be sold, they will only realize the amount

based on the table below.

To compute for the adjusted value of the assets, the Asset in PHP Book Value Valued at Asset Adjusted Value
current book values should be multiplied by the assumed Cash ₱100,000 100% ₱100,000
realizable value if they are liquidated.
AR, net 800,000 85% ₱680,000
Asset Value at Inventories 3,500,000 60% ₱2,100,000
Cash 100%
Prepaid expenses 100,000 25% ₱25,000
AR, net 85%
Inventories 60% PPE, net 4,500,000 60% ₱2,700,000
Prepaid expenses 25% Total Assets ₱9,000,000 ₱5,605,000
PPE, net 60%
Total Assets
 LVM – PROBLEM 2

If assets will be sold, they will only realize the amount

based on the table below.

To compute for the adjusted value of the assets, the

current book values should be multiplied by the assumed Asset Adjusted Value ₱5,605,000
realizable value if they are liquidated.
Less: Total liabilities to be settled 2,000,000
Asset Value at Liquidation value ₱3,605,000
Cash 100%
/No, of outstanding shares 250,000
AR, net 85%
Inventories 60% Liquidation value per share ₱14.42
Prepaid expenses 25%
PPE, net 60%
Total Assets
THANK
YOU