Adjusted Book Value

What is Adjusted Book Value?

An adjusted book value is a measure of a company's valuation after liabilities, including off-balance sheet liabilities, and assets are adjusted to reflect true fair market value. The potential downside of using an adjusted book value is that a business could be worth more than its stated assets and/or liabilities because it fails to value intangible assets, account for discounts, or factor in contingent liabilities. It is not often accepted as an accurate picture of a profitable company's operating value, however, it can be a way of capturing potential equity available in a firm.[1]

The adjusted-book-value approach should be distinguished from other approaches that rely on the balance sheet. For example, a method relying on book value, which is nothing more than an accumulation of historical earnings that were not otherwise disposed of, does not reflect fair market value, except by coincidence. It should also be distinguished from the price-to-book method, which is an approach to value that relies on the market as opposed to the summation of the asset values. The adjusted-book-value approach should also be differentiated from any sort of liquidation valuation, which typically represents the value that would pertain if the assets were to be separated from the business and sold in the open market. The value of assets in the open market does not accord the assets the full consideration they warrant in terms of their contributive worth to the continuing business.[2]

Under Regulation T of the Federal Reserve Board, Adjusted Book Value is the formula used for determining the status of a margin account. It is the value that results after one or more than one asset or liability amounts change by way of adding, deleting, or changing in any way which makes the figures different from what shows in the financial statement. There are two ways in which we can do it, i.e. Tangible Book Value or Economic Book Value which is also called Book Value at Market. Treating it as Tangible Book Value is not the same as treating it as Economic Book Value where the value of existing subtle assets like goodwill, patents, etc where there is the probability of getting some value for it; is then deducted from the asset. Even start-up costs and overdue operations costs can be considered under the subtle assets category.[3]

See Also

Investor Sentiment