Subtracting liabilities in asset valuation

Subtracting liabilities

The liabilities of a going concern, taken at face value, are subtracted from assessment in the reproduction cost method of valuation.

Judgment is required for certain liability classes, however, such as for deferred tax liabilities or contingencies. A new entrant would not necessarily face such obligations. If not, they may be omitted.

Debt, however, should be subtracted, either at its carrying amount or its market value, whichever is higher.

Analysing the balance sheet includes assessing the level of liabilities and determining whether all liabilities are properly recorded.

It is also prudent to examine the relationship between recorded depreciation over time and capital reinvestment levels. The former is a proxy for the latter; as a proxy, it must be tested to determine whether actual reinvestment needs are more or less than recorded depreciation expenses.


Also read:
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2.Reliability of financial data
3.Asset valuation approach in liquidation
4.Asset valuation approaches in active companies
5.Valuing Hidden assets
6.Subtracting liabilities in asset valuation
7.Balance Sheet Value: Summary