4.1: Capital assets

Capital assets, sometimes referred to as Fixed Assets or Property, Plant and Equipment, are the long-term assets held by a business to support its long-term operations. In most cases, capital assets are tangible, but they may include such intangible assets as acquired Goodwill, Brands, and Intellectual Property.

The book values and disclosure of such assets are subject to accounting standards that determine cost, amortization (depreciation), and impairments. Tax allowances may be claimed at rates set by the taxation authorities.

Book values of capital assets seldom represent their fair market value.

Given that assets seldom physically depreciate at the same rate as is provided for amortization, their fair market values are seldom the same as their book values. In cases where the amounts are not material, no adjustment is necessary. However, where the assets have values that are material in relation to the overall value of the business, a CBV will review and adjust the book values to their fair market values. Independent appraisals by qualified real estate or equipment appraisers may be needed.

This adjustment has two major implications:

  • It impacts the calculated value of goodwill, given that the value of goodwill is usually the difference between the enterprise’s value based on the capitalization of earnings or cashflows and the fair market value of the operational net tangible assets; and
  • If there is no value found for goodwill, the value of the enterprise is determined on an adjusted net assets basis, which requires that all assets are reflected at the fair market values on a stand-alone basis.

Contact MVI at the start of a valuation engagement if you consider that the capital assets may need to be appraised by an independent real estate or equipment appraiser.