Page 66 - Bankruptcy and Reorganization Services

(3) Musical works, such as compositions, song lyrics, advertising jingles

(4) Pictures, photographs

(5) Video and audiovisual material, including motion pictures or films, music videos,
television programs

When creating an adjusted market value balance sheet, the valuation analyst must add any inter-
nally developed intangible assets not currently on the balance sheet and remove historical, pur-
chased goodwill. Any goodwill value should be reflective of any residual market value of the
company after consideration of all separately identifiable tangible and intangible assets.

g. Off-Balance-Sheet Assets. In many instances, a company’s balance sheet will not reflect all of its
economic assets. Customer lists, trademarks and trade names and internally developed patents
and technology are common examples of assets that are often not recorded under GAAP but
which may have significant value to a business. For companies in financial distress, assets such
as these may be among the most valuable assets the business owns because they have value in
use and also in liquidation. Companies may also have a number of smaller assets that are not
recorded on the balance sheet because the company has expensed them for accounting purposes.
Individually, these assets (such as maintenance supplies) may appear immaterial, but in aggre-
gate their value could be substantial. In other cases, tangible assets that are fully depreciated still
provide economic value and, as such, need to be added to the balance sheet to reflect economic
reality. fn 32 Such off-balance-sheet assets may additionally include unliquidated, contingent, or
disputed assets (for instance, legal claims against other parties).

One significant off-balance-sheet asset for companies in financial distress may be the tax benefit
of a net operating loss carryover. This should be considered as an asset, if the debtor is expected
to realize benefits from the net operating loss in the future. Such benefits should be discounted to
their present value at a rate that reflects the riskiness of realizing the tax benefits.

For companies in financial distress, the adjusted balance sheet can look dramatically different
from the GAAP balance sheet. Some assets, like trade accounts receivable, inventory, and ma-
chinery and equipment may be worth much less than book value, especially in liquidation. Other
assets, like customer and marketing intangibles, may not be reflected on the company’s balance
sheet yet may possess significant value.

Valuing Individual Liabilities

A comprehensive discussion of the valuation of debt is beyond the scope of this practice aid. This sec-
tion is meant to provide concepts and principles that will hopefully offer a framework from which a
meaningful assessment of liabilities can be conducted.

In the context of bankruptcy or financial distress, debt is categorized as liquidated, unliquidated, contin-
gent, or disputed. Debt that is known to exist by both the creditor and debtor is either liquidated or
unliquidated. The term liquidate, in the context of indebtedness, means to determine by agreement or by

fn 32 Fishman, Pratt, Griffith, and Wilson, Guide to Business Valuations, 702.5.

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