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turn on invested reserve accounts. fn 42 A facts and circumstances analysis is necessary to assess the ap-
propriate level of cash outflows and the applicable interest rate.

Given that the existence of contingent debt is conditioned upon the occurrence of some future event, it is
necessary to assess contingent liabilities based on the probability that the contingency will occur and the
debt will become real. fn 43 As with unliquidated debt, such a determination is a facts and circumstances
assessment.

As stated previously, a cause of action is an example of a disputed liability. The existence of the liability
is not conditioned upon the occurrence of some future event. Instead, all the circumstances that may or
may not give rise to the liability are in place. All that remains is for a trier of fact to determine whether
or not the pre-existing circumstances give rise to a liability and, if so, what the amount of that liability
should be. Although some practitioners and courts treat causes of action as similar to contingent liabili-
ties, many practitioners and courts have recognized the aforementioned distinction and assess causes of
action in a different manner. fn 44 Such an assessment is a facts and circumstances exercise, but in many
instances the amount of the liability is determined based on the results of the trial or the settlement nego-
tiated between the parties on the basis that such information, although it postdates the valuation, is es-
sentially a manifestation of conditions that existed and were knowable at the earlier valuation date.

Finally, a further consideration the analyst should make, after adjusting all assets and liabilities to their
market values, is whether the difference between the market value and the book value of the assets
should be tax affected. This adjustment will depend on the purpose of the value estimate, as well as the
likelihood and timing of any potential sale of the business or its assets and whether the sale would trig-
ger a tax liability.

Common Errors in the Asset Approach

The following are some common errors made by practitioners when developing models using the asset
approach:

a. All assets and liabilities are not identified and valued.

i. All intangible assets should be considered.

ii. All off-balance-sheet items including unliquidated, contingent, and disputed assets and li-
abilities should be considered. fn 45

fn 42 In re City of Detroit, Michigan. Chapter 9. Case No. 13-53846.
www.detroitmi.gov/portals/0/docs/em/bankruptcy%20information/disclosure%20statement%20_plan%20for%20the%20adjustment%
20of%20debts%20of%20the%20city%20of%20detroit.pdf

fn 43 In re Xonics Petrochemical, Inc., 841 F.2d 198, 199–200 (7th Cir. 1998).
fn 44 Ian Ratner, Grant Stein, and John Weitnauer, Business Valuation and Bankruptcy (Hoboken, NJ: John Wiley & Sons, Inc., 2009).

fn 45 In this regard, it should be noted that, although GAAP financial statements represent an important starting point, they are not dis-
positive for valuation purposes.

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