Asset based approach

Question 1

Liquidation approach

Answer 1

• not going concern
• orderly (voluntary and get more money) and forced (less money)
• difference between orderly and forced is the control over the sales

Question 2

Liquidation steps

Answer 2

1) adjust BS assets to NRV
2) NRV - liabilities
3) calculate income tax based on the sale of assets at NRV to = the proceeds available for distribution
4) calculate personal income taxes on proceeds received to find net proceeds

Question 3

Adjusted net asset approach

Answer 3

• either: A) does not have active earnings (holding company) or B) active operations but no excess earnings
• Goodwill = 0
• FMV used instead of NRV
• FMV = floor value = lowest value that would be accepted in a sale

Question 4

Adjusted net asset steps

Answer 4

1) BS values adjusted to FMV
- intangibles = 0 when not identifiable
- identifiable intangibles (patent/license) can have value assigned
- include redundant assets, deduct redundant liabilities
2) Deduct foregone tax shield
- when FMV of assets > current tax value
- NPV of tax deductions on future CCA not available from purchase of shares (different for assets with 100% deduction)
3) deduct latent taxes (CG or recapture) and selling costs
- when FMV > tax cost = CG
- CG = POD - ACB x 50% = taxes

Question 5

Replacement cost approach

Answer 5

• current cost to replace assets
• replacement cost > BV because depreciation not taken into account
• adjust assets to replacement costs and then deduct liabilities to = value of business
• rarely used because no economic validity