Valuation of shares under Net Asset Method
(Guidelines issued by the ICAI)
Valuation of shares:
Formula to calculate the Value per share under Net Asset method is as follows:
(Total Assets – Liabilities – Preference shareholders) ÷ Total No. of outstanding Equity shares
A) Net Assets:
All asset should be valued at market value.
Points for consideration:
- Fixed assets valued at Market value if given or Book value should be arrived at after charging adequate depreciation.
- Land and Building whether freehold or leasehold should be taken into account, including unexpired period of lease,
- While realising plant and machinery factor of obsolescence due to technological improvements, changes in design, etc., should be considered,
- Quoted shares with isolated transactions and unquoted shares secondary valuation may be necessary,
- Due allowance should be given to obsolete, unusable, or unmarketable stocks
- Intangible assets should be included in Assets, whether they are appearing in the BS or not,
- All Fictitious assets must be ignored,
- Provision should be made for bad and doubtful debts on number of sundry debtors,
- Escalation claim, insurance claim, other similar claims, to be made on conservative basis,
- Development expenses should be included.
- All liabilities, whether appearing in the BS or not, must be taken into account
- Outstanding expenses and an appropriate amount of contingent liabilities must be taken into account
- Adequate provisions for taxation should be made
- The external liabilities such as sundry creditors, bills payable, loan, debentures etc. should be deducted.
C) Preference Shareholders:
The claim of preference shareholders must also be deducted from the Net Assets.
D) Total No. of outstanding Equity shares:
Companies’ stock currently held by shareholders.