Page 269 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

Notes The entire procedure of this method is divided into three parts:

Calculation of Net Value of Assets

For the determination of the total value of assets, assets of the business may be taken as per
book value, realisable value or net replacement value. If we have to find out the value of a going
concern, net replacement value of the tangible assets should be taken and, for the valuation of
the shares of such a concern which is going to be liquidated, net realisable value of the tangible
assets should be taken. If there is no information regarding the replacement value and realisable
value of the tangible assets, book value of the assets should be used after making the necessary
adjustments-regarding the depreciation, etc. But for wealth tax purpose, assets are taken at their
book values for the valuation of unquoted shares.

Only tangible assets of the business should be taken and fictitious assets must be ignored for the
purpose of valuation of shares. But goodwill should be included with the total of tangible assets
after doing a proper valuation. Methods of valuation of goodwill have been discussed in the
previous chapter ‘Valuation of Goodwill’ in detail.
Generally, investments in quoted shares or debentures are taken at their market value. And
sundry debtors must be valued after making the necessary provision for Bad and Doubtful Debts.
Non-trading assets are also included in the assets at their market values.
In the case of inventories, stock of finished goods must be valued at market price and stock of raw
materials, work-in-progress and spare parts must be valued at cost price.
Then all tangible assets are totalled up which are called the gross assets. In order to determine the
net assets, all external liabilities are subtracted.

Calculation of External Liabilities

External liabilities are those which have to be paid to outsiders (not shareholders of the company).
Ascertaining the amount of liabilities, necessary provision for contingent liabilities and for
expenses as outstanding salaries, taxation, rent, etc. should be made.

If the proposed dividend on shares is not treated as liability, the intrinsic value of the share
which will be the resultant under this method will be cum-dividend value of the share. In order
to calculate the ex-dividend value of the shares, proposed dividend should be treated as liability
and must be subtracted from the gross assets.
In ascertaining the value of equity shares, amounts due to preference share-holders must be
treated as liability. The amount due to preference shareholders includes the dividends on
preference shares in arrear and amount of capital refunded at the time of liquidation of the
company. Generally, it is ascertained as per the terms of issue of preference shares. If preference
shares are participating, their claim in surplus of profit should be included in the liabilities.

Did u know? Where share schemes are established in a unquoted company, the value of
those shares may need to be agreed in advance with the Inland Revenue and will need to
be communicated to employees if the share scheme is to incentivise staff as intended.

Fixation of the Value of Shares

In order to determine the value per share, any one of the following methods can be adopted as
per the question:
When the entire share capital is in one type of equity shares: To compute the intrinsic value per
share, the net assets are divided by the total number of equity shares. Formula:

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