Valuation of shares

(S R Patil)

 Radhanagari Mahavidya Radhanagari 

B Com -II sem-V

Corporate Accounting

Valuation of shares 

Though, the company fixes the value of its shares, which is termed as face value, the actual price may be different and therefore, it becomes necessary to value the shares in the following circumstances.

(i) When unquoted shares are to be sold by the shareholders.

(ii) For Estate Duty purpose.

(iii) At the time of amalgamation, absorption and reconstruction. (iv) If loan is to be raised on the security of shares.

(v) Conversion of one class of shares into another class.

There are three methods of valuation of shares viz.

(1) Net Assets Method, (2) Yield Method, (3) Fair Value 1. Net Assets Method or Intrinsic Value Method

This method is also called balance-sheet method or asset backing method, or intrinsic or break-up value method. Under this method, an attempt is made to determine as to how much amount per share a shareholder will receive on the date of determination of the value of shares. For this purpose, it is necessary to determine the net assets of the business as on that date. Net assets mean the total of realisable assets including non-trading investments and goodwill less the total of third party liabilities. As only realisable assets are to be taken, the items such as preliminary expenses, discount on debentures/shares, underwriting commission, Profit & Loss A/c (debit balance) etc. appearing under the heading "Miscellaneous Expenditure & Losses" are not to be taken into consideration. Similarly, realisable values and not the book-values are to be considered.

The intrinsic value per share is arrived at by dividing the value assets by the number of shares issued and subscribed.

of net

Important Points 

1: While taking third party liabilities, even contingent liabilities are to be considered.

2. Depreciation Fund: If there is a depreciation fund in respect of any

fixed asset and no change in the value of that asset is given, the depreciation

fund is to be deducted from the value of that asset to get its realiable value. However, if realisable value of such asset is given separately, the depreciation fund is not to be considered at all. The realisable value is to be taken.