Adjusted Book Value

What Is the Adjusted Book Value?

Adjusted book value is the measure of an organization's valuation after liabilities — including off-balance sheet liabilities — and assets adjusted to reflect true fair market value. The expected downside of utilizing adjusted book value is that a business could be worth more than its stated assets and liabilities since it neglects to value elusive assets, account for discounts, or factors in contingent liabilities. Be that as it may, it's rare accepted as an accurate image of a productive organization's operating value; notwithstanding, it very well may be an approach to catching potential equity accessible in a firm.

How Adjusted Book Value Works

There are several methods an investor can use to assign value or price to a business. Concluding which form of valuation method to utilize includes several factors like the firm type and availability of information.

The adjusted book value method of valuation is most frequently used to assign value to distressed companies facing likely liquidation or companies that hold tangible assets, like property or securities. Analysts might utilize adjusted book value to determine a primary concern price for an organization's value while expecting bankruptcy or sale due to financial distress.

Special Considerations

Changing the book value of a firm involves line-by-line analysis. Some are clear like cash and short-term debt. These things are as of now carried at the fair market value on the balance sheet.

The value of receivables may must be adjusted, contingent upon the age of the receivables. For instance, receivables that are 180 days past due (and reasonable doubtful) will get a haircut in value compared to receivables under 30 days. Inventory can be subject to adjustment, contingent upon the inventory accounting method. In the event that a firm utilizes the Last In, First Out (LIFO) method, the LIFO reserve must be added back.

Property, plant, and equipment (PP&E) is subject to large adjustments, especially the land value, which is held on the balance sheet at historical cost. The value of the land would almost certainly be far greater than the historical cost as a rule. Gauges for what structures and equipment would bring in the open market must be made.

The adjustment cycle turns out to be more confounded with things like intangible assets, contingent liabilities, deferred tax assets, or liabilities, and off-balance sheet (OBS) things. Additionally, minority interests, if present, will call for additional adjustments to book value. The goal is to mark every asset and liability to fair market value. After the values of the multitude of assets and liabilities are adjusted, the analyst must just deduct the liabilities from the assets to infer the fair value of the firm.

Features

• Adjusted book value is where a valuation is adjusted to reflect fair market value.
• The downside of utilizing adjusted book value is that a business could be worth more than its stated assets and liabilities since it neglects to value elusive assets.
• The adjusted book value method of valuation is most frequently used to assign value to distressed companies facing possible liquidation or companies that hold(/tangibleasset)tangible assets.