Page 62 - Bankruptcy and Reorganization Services

Practitioners will typically use the GAAP-based balance sheet of the subject business as a starting point
in applying the asset approach. However, because the assets and liabilities are revalued as of the valua-
tion date, and certain assets and liabilities not appearing on the GAAP statement may be added, the ad-
justed balance sheet will often differ significantly from the GAAP balance sheet. Therefore, an unad-
justed GAAP balance sheet is rarely used as a proxy for the final valuation product.

The asset approach is most relevant when the following conditions are met:

1. The subject company holds significant tangible assets (for instance, holding companies and in-
vestment companies).

2. The company has no significant intangible assets, especially goodwill (the exception is mining or
oil and gas production companies with intangible assets such as mineral rights).

3. The company has no established earnings history, where projected earnings may be impractical
or impossible to develop and where a comparison to guideline companies and transactions is also
not feasible.

4. The company has an uncertain future as a going concern, where the value of the net assets of the
business may exceed the value under the income and market approaches, or where there exists a
possibility of liquidation in the near future. fn 25

This approach generally sets a baseline or minimum value (also known as a "floor value") for determin-
ing total enterprise value.

Under the asset approach, assets are valued, either individually or as an assemblage of assets, under the
proper standard and premise of value. Liabilities are also considered if the valuation engagement is to
assess the value of equity.

Developing a value estimate using the asset approach typically involves the following steps:

1. Obtain the balance sheet as of, or as near as possible but prior to, the valuation date. fn 26

2. Adjust the balance sheet, if necessary, for any known unrecorded or off-balance-sheet assets and
for any known unrecorded, off-balance-sheet or contingent liabilities.

3. Adjust each identified asset to its appraised value, based on the appropriate standard and premise
of value, as of the valuation date.

4. Adjust each liability to an appropriate value or amount, if materially different from its book val-
ue, given the appropriate standard or premise of value. For example, in some contexts, an ap-
praised or settlement value may reflect the appropriate estimate, whereas in other contexts, the

fn 25 Jay E. Fishman, Shannon P. Pratt, J. Clifford Griffith, D. Keith Wilson, Guide to Business Valuations, 9th ed. (Fort Worth, TX:
Practitioners Publishing Company, 1999), 701.2.

fn 26 In an assessment of solvency, it may be necessary to consider financial information both before and after the valuation date if
financial information doesn’t exist as of the valuation date. This principle is frequently referred to in bankruptcy courts as the principle
of retrojection and projection.

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