Fixed asset fair value in EV or separate?
Had a discussion the other day with a colleague from work.
Business: company buys local goods, processes them, then exports.
The company owns fixed assets (property and lands). However, the business is not tied to these properties or land to function. That is to say, it could move its operations to a building across the street from the current one.
Solution: PV of the business should consider a fair value lease related to these assets (even though they own them) in order to separate the PV of the business + fair value of the fixed-assets (buildings and land) as a package.
Is this correct? Or is there a more correct way to do this?
Thanks in advance
Since the property is owner-occupied I would think it should be valued at cost, even though it’s not used for producing goods. Your thinking about valuing at as a lease makes sense to me, but not sure if accounting standards would allow that. If the company reports IFRS, you could use the revaluation model and measure the assets at value. Then there wouldn’t be a need to split the business and the assets.
If the company needs these fixed assets to generate income, then they should be included in the value of the business. Otherwise, they can be treated as non-operating assets and backed out of the concluded enterprise value.
If this company has, say $1m of fixed assets, but it could operate at the same capacity with a facility that costs half the amount, you could theoretically back out the $500k difference from EV. Is that what you’re getting at with the fair value lease?
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