Definition of the adjusted net asset method

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What is the adjusted net asset method?

The adjusted net assets method is a business valuation technique that modifies the reported values ​​of a company’s assets and liabilities to better reflect its estimated current fair market values. By adjusting up or down the values ​​of the asset or liability, the net effect provides values ​​that can be used in going concern assessments or liquidation scenarios. This method can also be called the asset accumulation method.

Key points to remember

  • The adjusted net asset method, also known as the asset accumulation method, is a business valuation that adjusts assets and liabilities to reflect fair market value.
  • This valuation method can be used in liquidation scenarios or going concern valuations.
  • The adjusted net asset method focuses on assets and liabilities, while other valuation methods, such as dividend discounting, are based on income.
  • The adjusted net assets method includes off-balance sheet assets and unrecorded liabilities such as leases.
  • The adjusted book value is the difference between the total fair market value of the adjusted assets and the total fair market value of the adjusted liabilities.

How the adjusted net asset method works

In some cases, it may be difficult to establish an accurate valuation of the business using market or revenue-based approaches. These methods are common in dividend discount, capitalization, and cash flow models. The alternative method focuses on the assets and liabilities of a business enterprise.

The adjusted net asset method would include tangible and intangible assets during the adjustment process. Also included are off-balance sheet assets (OBS) and unrecorded liabilities, such as leases or other notable commitments. The difference between the total fair market value of the adjusted assets and the total fair market value of the adjusted liabilities is the “adjusted book value” (what the company is considered to be worth).

According to Sean Saari, CPA/ABV, of accounting firm Skoda Minotti, consideration of the adjusted net asset method is generally most appropriate when:

  • Valuing a holding company or a capital-intensive company;
  • Losses are continually generated by the business; Where
  • Valuation methodologies based on a company’s net income or cash flow levels indicate a value lower than its adjusted net asset value.

“Keep in mind that when income or market-based valuation approaches show higher values ​​than the adjusted net asset method, they are usually discarded to reach the final value of the business” , Saari wrote. “That’s because revenue and market-based valuation approaches provide a much more accurate reflection of any goodwill or intangible value the business may have.”

Special Considerations

The adjusted net asset method is the most common asset-based approach. However, income and market based approaches tend to provide a more accurate representation of goodwill and intangible value.

Adjustments to the net asset method may include adjusting capital assets to reflect fair value, adding unrecorded liabilities (i.e. judgments) and reducing accounts receivable to reflect account of uncollectible balances.

Again, the adjusted net asset method can be used for various valuations, such as liquidations. This method can also be useful when evaluating holding companies or those operating in capital-intensive industries. Other instances where the adjusted net asset method is useful are when income or cash flow based valuations are lower than the adjusted net asset value.

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