02-15-2011, 08:31 PM
There is no hard and fast rule to include or exclude any assets or liabilities when you wish to base your valuation on adjusted balance sheet based break up values.
To be more precise, none of the liabilities or assets are excluded without any reason or demonstrable justification. What you have to do is, analyze each liability and asset heads in such depth that you either tend to agree with the basis adopted for recognition and measurement or have concrete basis to object on such liability or asset. Objections can interalia be altogether on the existence/recognition of such liability or asset or on precision of its measurement etc. These objections can lead to due diligence adjustments regarding any head of liability or asset.
These adjustments are not to be recorded in the books of account compulsorily; rather, these are used only by the evaluator for reaching the adjusted balances of liabilities and assets with respect to his valuation.
If you surface a number of such adjustments and wish to incorporate them in the historical balance sheet of a cutoff date, you can add/deduct such adjustments from the reported balances to arrive at the adjusted balance sheet figures for your break-up valuation purpose.
Remember one thing; if you intend to reach adjusted breakup values, you should try your maximum to reach the fair value based justified figures of reported assets. For example, with respect to fixed assets, you can get a revaluation done on the basis of observable market data and use the expertise of some expert independent engineers (Technical consultants). You can take values of investments with respect to mark to market pricing with an analytical look of the trends in the period after the cutoff date agreed for due diligence, as well. You may have to very closely analyze the receivable to see if appropriate provisions exist for doubtful balances. You may have to inspect inventories and based upon your analysis conclude if some obsolescence provision is required for valuation. Similarly, you have to see if all legal evidence (challans, invoices, bills, statements etc) are available against tax refundable amounts and whether it is expected to be recovered in full. These principles have to be applied on all balances. You must agree and circularize balance confirmations to judge the quality of bank balances, investments, receivables etc. You should adopt some procedures to confirm the amounts due from statutory authorities as well.
With respect to liabilities, you have to take into account all off balance sheet liabilities as well which in your best judgment have remote chances to arise e.g. liabilities which may arise as a result of unfavorable decisions on pending litigation. For this purpose, the evaluators may need independent sub-evaluations by legal consultants as well. You may also have to get valuations of employeesâ benefits from independent actuaries, if the nature of such benefits requires it. You must supplement your work by having confirmation from financers for the amounts due to them as of the cutoff date. You must agree and circularize balance confirmations to judge the adequacy of payables as of the cutoff date. You should adopt some procedures to confirm the amounts due to statutory authorities as well.
So these are a few tips; as I said earlier, this is a very detailed and skillful exercise and unless one has the appropriate skills, training, vision and knowledge, he/she may not be well suited to conduct such exercise. Because the margin of errors is NIL in this professional work.
I hope the above would be sufficient to make out a base point for the race.
One last point, keep in mind adjusted balance sheet based break-up value may not be a valid measure of concluding the pricing to be offered. One has to go to DCF valuation techniques and sophisticated financial modelling as well to substantiate his values. After having different valuations, the pricing range should be concluded.
Regards,
To be more precise, none of the liabilities or assets are excluded without any reason or demonstrable justification. What you have to do is, analyze each liability and asset heads in such depth that you either tend to agree with the basis adopted for recognition and measurement or have concrete basis to object on such liability or asset. Objections can interalia be altogether on the existence/recognition of such liability or asset or on precision of its measurement etc. These objections can lead to due diligence adjustments regarding any head of liability or asset.
These adjustments are not to be recorded in the books of account compulsorily; rather, these are used only by the evaluator for reaching the adjusted balances of liabilities and assets with respect to his valuation.
If you surface a number of such adjustments and wish to incorporate them in the historical balance sheet of a cutoff date, you can add/deduct such adjustments from the reported balances to arrive at the adjusted balance sheet figures for your break-up valuation purpose.
Remember one thing; if you intend to reach adjusted breakup values, you should try your maximum to reach the fair value based justified figures of reported assets. For example, with respect to fixed assets, you can get a revaluation done on the basis of observable market data and use the expertise of some expert independent engineers (Technical consultants). You can take values of investments with respect to mark to market pricing with an analytical look of the trends in the period after the cutoff date agreed for due diligence, as well. You may have to very closely analyze the receivable to see if appropriate provisions exist for doubtful balances. You may have to inspect inventories and based upon your analysis conclude if some obsolescence provision is required for valuation. Similarly, you have to see if all legal evidence (challans, invoices, bills, statements etc) are available against tax refundable amounts and whether it is expected to be recovered in full. These principles have to be applied on all balances. You must agree and circularize balance confirmations to judge the quality of bank balances, investments, receivables etc. You should adopt some procedures to confirm the amounts due from statutory authorities as well.
With respect to liabilities, you have to take into account all off balance sheet liabilities as well which in your best judgment have remote chances to arise e.g. liabilities which may arise as a result of unfavorable decisions on pending litigation. For this purpose, the evaluators may need independent sub-evaluations by legal consultants as well. You may also have to get valuations of employeesâ benefits from independent actuaries, if the nature of such benefits requires it. You must supplement your work by having confirmation from financers for the amounts due to them as of the cutoff date. You must agree and circularize balance confirmations to judge the adequacy of payables as of the cutoff date. You should adopt some procedures to confirm the amounts due to statutory authorities as well.
So these are a few tips; as I said earlier, this is a very detailed and skillful exercise and unless one has the appropriate skills, training, vision and knowledge, he/she may not be well suited to conduct such exercise. Because the margin of errors is NIL in this professional work.
I hope the above would be sufficient to make out a base point for the race.
One last point, keep in mind adjusted balance sheet based break-up value may not be a valid measure of concluding the pricing to be offered. One has to go to DCF valuation techniques and sophisticated financial modelling as well to substantiate his values. After having different valuations, the pricing range should be concluded.
Regards,
