Chapter 7

Question 1

What are other names for the asset-based approach?

Answer 1

Cost approach, asset approach, and replacement cost approach

Question 2

When will the asset approach receive primary consideration per Revenue Ruling 59-60?

Answer 2

Investment or holding type company

Question 3

What is the formula/theory of the asset approach?

Answer 3

Current value of all assets (tangible and intangible) less current value of all liabilities = current value of equity

Question 4

What economic principle supports the asset approach?

Answer 4

Substitution - a buyer would not pay more than the value of an equally desirable substitute

Question 5

What type of indication of value results from an asset approach?

Answer 5

Controlling, marketable although marketability issues may be incorporated into the value of individual assets so lower DLOMs may be required

Question 6

What premise of value can the asset approach be used on?

Answer 6

Going concern or liquidation

Question 7

When is the asset approach most appropriate?

Answer 7

(1) Value of cash flows generated by current use of hte assets is less than cash flow that could be generated from alternate uses or (2) returns available to shareholders are not a fair indication of value of the underlying assets

Question 8

What companies may be most appropriate for an asset approach?

Answer 8

1) real estate, investment, or asset-intensive holding companies
2) high percentage of nonoperating assets
3) start-up or troubled companies with little/no earnings history
4) natural resource companies
5) utilities
6) not-for-profits
7) manufacturing companies
8) controlling interests that can liquidate assets

Question 9

When would appraisals of individual assets be necessary?

Answer 9

Machinery and equipment, real estate, intangible assets (royalties, patents, IP)

Question 10

What are five problems with an asset approach?

Answer 10

1) may be cost and time constraints to perform extensive analyses on receivables, inventories, and to obtain appraisals of fixed assets
2) when material intangibles exist, may heavily rely on the income element of the entity
3) may be impossible to identify/measure all intangible value drivers
4) should be consistency for the premise/standard of value between tangible asset appraisals and business value
5) may be a mistaken understanding that book value = FMV or standard of value

Question 11

What is a going concern premise of value?

Answer 11

Company will continue to operate in a manner consistent with intended business purpose in the future

Question 12

What is an orderly liquidation premise of value?

Answer 12

Assumes liquidation with assets sold piecemeal with the benefit of being on the market for a reasonable period under some plan of liquidation

Question 13

What is a forced liquidation premise of value?

Answer 13

Assumes liquidation with asset sold piecemeal but without the benefit of being on the market for a reasonable period with no plan of liquidation. Reflects the effect of third parties (creditors) affecting market forces

Question 14

What is an assembled group of assets premise of value?

Answer 14

Assembled group of assets not currently used in the production of income and not part of the going concern enterprise. Not operating but capable of being an income-producing concern

Question 15

What are other names for the adjusted net asset value method?

Answer 15

Asset accumulation method or adjusted book value method

Question 16

What are the steps to applying the adjusted net asset value method?

Answer 16

1) Obtain GAAP-based financials if available (which have assets at historical cost)
2) Analyze the financials and determine if assets/liabilities require adjustment to reflect FMV or other standard of value
3) Identify all off-balance sheet assets/liabilities such as contingent liabilities

Question 17

For an equity value, what should you do in the adjusted net asset value method?

Answer 17

Incorporate all off-balance sheet assets including intangibles and liabilities

Question 18

What is the typical premise of value for the adjusted net asset value method?

Answer 18

Going concern

Question 19

Should the balance sheet be tax-affected in the adjusted net asset value method?

Answer 19

Very controversial but if done, it should be stated clearly

Question 20

What 10 questions should be asked regarding the impact of potential taxes under the adjusted net asset value method?

Answer 20

1) Is it a taxable or pass-through entity?
2) Is it a viable concern (will taxes be paid)
3) Actual versus hypothetical sale
4) Does it involve a write-up of inventory
5) Did you use pre- or post-tax in the income method
6) Should negative be netted with positive tax effects
7) Should deferred tax liabilities with temporary differences be eliminated
8) Would a hypothetical purchase consider the impact of potential imbedded capital gains taxes in the value
9) Is liquidation contemplated
10) Should it be on the balance sheet or in a DLOM

Question 21

What are common premises of value used in appraising tangible assets like machinery and equipment?

Answer 21

1) reproduction cost new
2) replacement cost new
3) fair market value
4) fair market value in continued use - assumes earnings support the value reported and includes all normal direct and indirect costs to make property fully operational - may not readily pertain to aircraft
5) orderly liquidation value
6) forced liquidation value

Question 22

What three approaches to value are used in the valuation of tangible assets?

Answer 22

Market, income, cost (replacement cost)

Question 23

How is depreciation determined in a valuation of tangible assets?

Answer 23

1) FMV obtained through the used market with the difference between replacement and market value indicating depreciation
2) Age/life analysis

Question 24

When are tangible asset appraisals needed?

Answer 24

1) purchase price allocation for tax purposes and fair value allocation for financial reporting
2) income stream does not provide a value indication greater than the tangible assets
3) investment decisions by user of valuation
4) liquidation or sale of total entity including all or certain tangible assets
5) non-operating assets such as rental property, boats, planes
6) real estate holding companies/limited partnerships
7) business requires use of special purpose building
8) financials don’t reflect true economic costs of operating (fully depreciated assets still employed)
9) to adjust balance sheet to reflect FMV of tangible assets

Question 25

What appraiser qualifications are required for creating tangible asset appraisal reports?

Answer 25

Education, public representation, experience, professional appraisal associations, licenses, USPAP standards

Question 26

What formats are allowed under USPAP standards for tangible asset appraisal reports?

Answer 26

Self-contained appraisal reports
Summary appraisal report
Restricted use appraisal report

Question 27

What additional factors should be considered for inclusion in the USPAP report?

Answer 27

1) does it make sense/reasonable
2) Logical, consistent writing
3) Market prices, rental rates, operating expenses total different from expectations
4) Statement of certification
5) Statement of assumptions/limiting conditions
6) Factual errors

Question 28

What should a valuation analsyt know about tangible asset valuations?

Answer 28

1) difference between various types and definitions used by tangible asset appraisers
2) valuation approaches and variation used
3) certifications and types of property covered by the certifications
4) difference in the three types of reports and appropriate use
5) basic understanding of USPAP

Question 29

What approaches are utilized to appraise real property?

Answer 29

Sales comparable approach, income, and cost