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When assessing the value of an asset, it is important to first identify the applicable standard and premise
of value. Although the concepts of a standard and premise of value are not typically used for liabilities
in the same way such concepts are used when valuing assets, it is important to develop a standard and
premise of value framework for valuing liabilities. For example, as a threshold assessment, it is instruc-
tive to determine whether liabilities should be evaluated under one of two premises of value: (1) value in
use or (2) value in exchange. The premise of value will typically be dictated by the purpose of the valua-
tion. Each premise is discussed in greater detail here:

1. Value in use. This is the amount of the liability that would be paid, or would be expected to be
paid, in the normal course of business. No transactions or trading of the debt are contemplated
under this premise of value. For liquidated debt, this would typically be face value or par value.
This premise of value would typically be used for a solvency analysis or claims determination. fn
39 fn 40

2. Value in exchange. This is the market value of the liability, and it contemplates transactions or
the trading value of the debt. This premise of value would typically be used to estimate the equi-
ty value of the business for financial reporting purposes or in the context of a workout.

Note that the premise of value for the liabilities will not always be the same as the premise of value for
the assets. For example, to estimate the fair market value of the equity of a business under the asset ap-
proach, for financial reporting purposes, the assets could be valued under the value in use premise as a
going concern. In this case, the current liquidated liabilities would also be valued under the value in use
premise, but the long-term liquidated liabilities would be valued under the value in exchange premise.

The value of certain liquidated liabilities may also be affected by the assets they are associated with. The
most common example would be a debt that is collateralized by a specific asset or group of assets. If the
value of the asset sufficiently collateralizes the liability, then value in exchange of the liability may be
unaffected by default risk even if other liabilities have a market rate that is reduced for default risk.

When assessing the value of unliquidated debt, a determination must be made of the anticipated cash
outflows as well as the appropriate discount rate to employ when assessing the present value of the obli-
gation. Either deterministic or probabilistic methods may be employed when assessing the anticipated
cash outflows, and discount rates may range from a near risk-free rate fn 41 to the anticipated rate of re-

fn 39 As indicated here and as discussed in greater detail in chapter 13 of this practice aid, the face value, as opposed to the market val-
ue, of liquidated liabilities is the more meaningful quantification of liabilities in the context of a solvency analysis. This is true wheth-
er the solvency analysis is performed under a going concern or liquidation premise of value.

fn 40 Under the Bankruptcy Code, the determination of a lessor’s claim for damages due to the rejection of a nonresidential real estate
lease is capped. In particular, Section 502(b)(6) limits the amount of a lessor’s claim for damages to the amount of the rent reserved by
such lease, without acceleration, for the greater of (a) one year or (b) fifteen%, not to exceed three years, of the remaining term of the
lease, following the earlier of (1) the filing of the bankruptcy petition or (2) the date on which the lessor repossessed, or the debtor
surrendered, the leased premises. Notwithstanding this section in the Bankruptcy Code, the authors of this practice aid are of the opin-
ion that the cap set forth in Section 502(b)(6) should not be applied when determining the appropriate amount of liabilities for consid-
eration in a solvency study.

fn 41 In re Tronox, Inc. Securities Litigation, 769 F. Supp. 2d 202 (S.D.N.Y. 2011).

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