Page 265 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

Notes 12.1 Meaning of Valuation of Shares

When a company is floated, it mentions its total capital in the Capital Clause of the Memorandum
of Association and also mentions the total number of shares in which total capital of the company
is divided. The value of each share is also mentioned in it.

Example: Suppose the total share capital of a company is ` 10,00,000 which is divided
into 1,00,000 shares then value of one share will be ` 10. It is called face value or par value of the
share and this value is shown in the balance sheet of the company whether the market price of
the share is differing. This market price comes through the stock exchange. But sometimes these
prices are not realisable because these prices fluctuate due to demand and supply of the shares in
the market. As a result the market price does not show the true value of the share.
Quotation price (market price determined by Stock Exchange) will be available of those companies
only, which are listed in the stock exchange. Thus, the market price of private companies and
unlisted public companies will not be available on a stock exchange. Therefore, the value of
shares of these companies is computed by accountants on a reasonable basis. Here, the citation
of the opinion of the Council of London Stock Exchange would be better regarding the quotation
price and valuation of shares: “We desire to state authoritatively that Stock Exchange quotations
are not related directly to the value of a company’s assets or to the accounts of its assets or to the
amount of its profits and consequently these quotations, no matter what date maybe chosen for
reference, cannot form a fair and equitable or rational basis for compensations.”
“The Stock Exchange …… does not determine the prices of which the official list is a record.
The Stock Exchange may be likened to a scientific recording instrument which registers, not its
own actions and opinions, but the actions and opinions of private and institutional investors
all over the country, and indeed the world. These actions and opinions are the results of hope,
fear, guesswork, intelligent or otherwise, good or bad investment policy and many other
considerations. The quotations that result definitely do not represent a valuation of a company
by reference to its assets and its earning potential.” Thus a quotation price neither represents Net
Assets Value nor the earning potential.

Self Assessment

State whether the following statements are true or false:
1. The purpose of assets valuation method is to determine the assets backing per share.
2. There is no difference between the equity shares and participating preference shares in
calculating the intrinsic value of the shares.
3. If a company is going to be liquidated, assets valuation method per valuation of shares is
not suitable.
4. If the shares are being purchased for controlling the interest, one should consider the rate
of earning and not the rate of dividend to ascertain the market value of the share.

12.2 Necessity of Valuation of Shares

Due to inadequacy of quotation price on the stock exchange serving the purpose of valuation
of shares, in the following cases the necessity of valuation of shares by a competent accountant
arises:
1. When amalgamation and absorption of companies take place.
2. When one class of shares is converted into another class.
3. When a company wants to acquire a control of interest of another company by purchasing
more than 50% of shares of that company.

260 LOVELY PROFESSIONAL UNIVERSITY