Modified Book Value

Modified book value is a valuation statistic that uses the current market value of a company’s assets and liabilities to determine its worth. This approach calculates the fair market value of a company’s assets and liabilities by modifying the net worth of its assets and liabilities. For example, a real estate’s market value may differ from its historical worth, which may be established by conducting an asset assessment to ascertain its fair market value.

As such, modified book value changes the value of an organization’s resources and liabilities to reflect honest assessment. The adjusted book esteem strategy is usually utilized when assessing upset organizations that are expecting liquidation. Due to the fact that assets are recorded at their original or historical cost, their current fair market value may fluctuate significantly from their historical costs. To arrive at a bottom-line price, the technique modifies the value of physical assets line by line.

Flows resources like money available and transient obligation are as of now caught at their honest evaluation, and they are recorded as they are. The resource valuation approach of altered book esteem accepts that the worth of an organization can be controlled by assessing the worth of its fundamental resources. Accounts receivables, on the other hand, will be modified based on their age. It’s critical to first understand a company’s book value before estimating its modified book value.

Example of Modified Book Value

A company’s book value is usually calculated as the value of its assets less all of its debts and liabilities. Receivables due in six months are more likely to be reduced since there is a chance that some debtors will default on their obligations. It may not be the case for short receivables, such as 30 and 45-day receivables, which are still too young to make a bad debt allowance.

All in all, if an organization were to sell all that it possesses and take care of the entirety of its liabilities, the leftover sum would be its book esteem. Financial backers use book esteem as a measurement to decide whether an organization is exaggerated or underestimated. Another current asset that has to be updated is inventory, which is adjusted based on inventory accounting methods such as LIFO and FIFO. Traditionally, while calculating book value, the value of a company’s assets on its balance sheet is taken into account.

However, the valuations of those assets are documented in accounting based on their original acquisition price, known as historical cost. In fact, asset prices can change over time and differ significantly from their historical cost. Because fixed assets, such as land, buildings, and property, plant, and equipment (PPE), have different values than current assets, they require significant modifications.

For instance, the value of land recorded on the accounting report is the authentic expense, and it should be changed in accordance with mirror the current honest assessment of the resource. In a perfect world, the honest evaluation of the land will be higher than the verifiable expense, since land appreciates in esteem throughout some stretch of time.

Modified book value goes a step further by estimating the current worth of the company’s assets and liabilities, resulting in a more current valuation. The fair market value of assets such as PP&E and motor vehicles, on the other hand, will be lower than the historical cost since these types of assets are susceptible to depreciation, which reduces the asset’s value. The sorts of resources remembered for book esteem and changed book esteem computations incorporate fixed resources, which are physical in nature or substantial, just as immaterial resources, which are not physical.

Modified book value is typically utilized when a firm is in financial distress or approaching bankruptcy. Banks and other creditors may have outstanding loans to the firm. As a result, the bank may demand that the company’s assets be valued again. The following is the fundamental procedure for calculating a firm’s adjusted book value that anybody may use:

  • The first step is to obtain a copy of the company’s annual report, which may be found on the company’s website or obtained by contacting the investor relations department. Next, look at the balance sheet to see which assets and liabilities need to be valued at fair market value.
  • After that, remove the liabilities from the total assets to arrive at the book value. The book value in this example is $400,000 because the total assets are $500,000 and the liabilities are $100,000.
  • Calculate the assets’ market value. Because the book value of assets like cash on hand and short-term obligations is computed on the balance sheet date, it does not need to be changed. To determine the current worth of the assets, do an appraisal and subtract the difference from the book value obtained in step 2 above.
  • To retrieve the assets that have been left off the balance sheet, go to Off-Balance Sheet Items. To get the modified book value, add these assets to the value you got in step 3.

Innovation, like computers and programming, would likewise reasonably have deteriorated in esteem. When the entirety of the reasonable market upsides of the entirety of the resources and is still up in the air, changed book worth can be determined by taking away the two aggregates. Companies can also engage business valuation services to assess a company’s value for a variety of reasons, such as mergers and acquisitions, shareholder transactions, estate planning, and financial reporting.

Information Sources:

  1. corporatefinanceinstitute.com
  2. investopedia.com