Net Book Value – Selling their assets short

Accountants are losing their companies thousands of pounds in unrealised assets, according to a new survey.

It sounds like a serious allegation. But Corporate Solutions, which commissioned the research, says the statistics speak for themselves.

‘Look at it,’ says managing director Anthony Lambert, ‘77% of UK companies value their machinery and equipment at net book value (NBV). They don’t realise that these depreciating assets could be worth a lot more on the open market. When they come to shed assets, they are selling them for considerably less than they’re worth.’

Lambert gives the explanatory example of a food processing and storage company which is currently selling off one of its warehouses and its contents.

The sale is being carried out on a ‘turn up and take it away’ basis, with a warehouse caretaker in charge of negotiations.

If, for example, a rival firm turns up to buy a packaging machine, the caretaker phones the company accountant and asks for a price. The accountant is using NBVs including depreciation.

In this case the packaging kit has depreciated over 15 years to the point where its NBV is no more than #50. Taking his instructions on this basis the caretaker sells the machine for #50, although its market value is somewhere in the region of #50,000.

According to the survey, small businesses ‘fall into this trap’ most often, with 91% of firms with a turnover of under #10m relying on NBV.

And who is in charge of these valuations? According to the survey, accountants are responsible for valuations in 52% of businesses, and the accompanying allegation to go with that statistic is that accountants are only interested in book value; they are not usually interested in finding out open market values.

‘I don’t think many accountants see asset valuation as a particularly important part of their job,’ says Lambert. ‘Everyone seems to focus on their front-end waste – trying to reduce raw material wastage and that kind of thing – but they don’t look at the money they’re losing when they shed undervalued assets.’

To put his enthusiasm for re-evaluation in perspective, Lambert’s firm, Corporate Solutions, is focused on asset management, and stands to benefit from corporate concerns about the treatment of assets.

In addition, figures from the Company’s House-based Company Reporting database show 65% of businesses have revalued assets in their accounts, demonstrating that awareness of the potential for re-evaluation is slightly higher than Corporate Solutions’ survey might suggest.

Nevertheless the issue is pertinent, especially as technology marches on apace and obsolescence becomes such a major issue. It is so timely, in fact, that the Accounting Standards Board is currently devoting considerable energy and resources to the question of re-valuation of assets, an issue addressed in the exposure draft FRED 17.

Of course the ASB is not judging whether it is better to go by NBVs or open market values, it is merely proposing a clear set of guidelines for people interested in re-valuing assets. But Hannah King, ASB project director for FRED 17, was prepared to give an independent view on re-valuation.

‘The regulations are unlikely to allow people to cherry-pick the assets they want to re-value, so they must be aware that they’ll have to re-value all assets of similar class in one go.

‘Equally if you do re-value, you will have to re-value at regular intervals.

It can be beneficial for a business, but it can be very costly.’

King suggests revaluation is key for some businesses. She gives the example of pubs and hotels which often change hands. ‘Market value is an important measure of their businesses, and they need to know the worth of the assets at any given time.’

But for other businesses, re-valuation can be pointless. A small manufacturing company, for example, may have premises which have appreciated considerably in value. However, those premises are essential to the continued success of the company.

It is expensive to re-value the building and its contents, and may have little benefit unless the company is about to be sold. In addition if the value of equipment goes up following an assessment, then clearly the depreciation charge will also increase, and that will reduce profit margins as it is put through the profit and loss account.

Lambert is undeterred, and points out valuation need not cost the earth.

‘All I’m saying is that when it comes to selling assets, which is big business these days, millions of pounds are being simply given away.’

It’s a point worth highlighting, but accountants are not going to be easily persuaded to move to an annual evaluation system, not, at least, until FRED 17 is cast in stone and the benefits of such a system have been demonstrated in practice.

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