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.

B) Liabilities:

  • 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.

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Qualification: Student - CA/CS/CMA
Company: Varma & Varma
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June 2021