Forum Archive Index - June 2003

["Dave Missen" <d.tackle@xtra.co.nz>]

Defining terms like book value can be confusing, particularly as there are different interpretations in different parts of the world and the impact of globalisation is mixing these up.

 

The most common interpretation (UK, USA, AUST, NZ) is that book value is the entities net worth as reflected in the balance sheet - ie the liquidation value assuming that assets would realise the value stated in the accounts.

 

Thus book value per share equals common shareholders equity divided by the number of common shares.

 

Market value per share is a different measure - it includes all of the information that the market has with regards future earnings prospects of the entity.  Balance sheets seldom reflect current values of assets, thus book value per share is often lower than market value per share.

 

Book value accounts for depreciation as required under various forms of taxation legislation.  Confusion also arises between taxation depreciation rates (a general table of depreciation rates for different classes of assets) and true accounting depreciation rates (where the value of the asset is written down as a function of its economic life).  Generally published company accounts reflect the impact of taxation style depreciation to derive book value which essentially allows all assets except land to be depreciated at a selection of given rates.  Often book value for individual assets (cost less depreciation as per tax depreciation scale) is quite different to market value.  In addition, tax depreciation scales do not account for economic obsolescence etc.

 

With mergers and acquisitions, the book values are transferred to the new entity, however the price paid for purchase may be considerably different than stated book value with some of the difference being accounted for in the value of goodwill, brands etc.  The end result is that the book value measure can provide a very misleading idea of the liquidation value of the assets.

 

Some companies shares trade at levels considerably above book value (Consider Intel at the end of 1999, share price $85.00, book value per share $9.75), a reflection of the perceived earnings potential of the company.