This is a common misconception. Particularly among experienced and well informed professionals like yourself. Book value is paid-in equity plus all retained earnings. The only way book value can be manipulated is by manipulating earnings first. Furthermore, most manipulation of earnings is done by moving accounting items through time, rather than simply inventing them, so in the long run book values are far more reliable than earnings. Technically, book value also excludes intangibles such as goodwill. Of course, this makes book value even harder to fudge compared with earnings. Hope that helps. Martin
Bullshitt. Book value = shareholders equity - intangible assets Shareholders equity = assets - liabilities = paid-in equity + retained earnings Keep trying. Maybe you'll be right one of these days. Martin
Asset values are the easiest to manipulate - thats why due diligience is performed before any M&A activity occurs. You really need to think about what the definitions are telling you before latching on to them as truth and value statements. Heres a link for you about your hero- http://www.nypost.com/business/sec_eyes_buffett_divisions_business_.htm
Any manipulation of net assets must come from a manipulation of earnings. This is accounting 101. If you still don't understand this, I can explain it in smaller words. Incidentally, the reason due dilligence looks at assets is because it is <i>easier</i> to find manipulation of asset values than manipulations of a long string of earnings going into the distant past. If asset values really were easier to manipulate than earnings, then auditors performing due dilligence would go over umpteen years of earnings statements rather than the current balance sheet in order to calculate book value. Martin
i read a lot these days: "The process of calculating a market value for an asset is called marking-to-market. For less actively traded assets, this process can be highly subjective. Models may be used to project what market values might be, assuming an active market did exist. Reliance on such models has been disparagingly referred to as marking-to-model. During the late 1990s and early 2000s, Enron Corporation used mark-to-model valuation extensively as a means of manipulating its financial reporting. Of course, book value accounting is also subject to manipulation. A firm can "manufacture" book value earnings by selectively selling assets whose market values exceed their book values while continuing to hold assets whose market values are less than their book values. Such selective realization of gains is called gains trading. It is frequently done by corporations that want to boost their reported earnings. The reverse strategy selectively realizing losses can be used to reduce a corporation's taxes." does this make sense? and then perhaps we can delve into deceiptive depreciation techniques...
2cents, that's a good point and your source is right on. However, it's important not to confuse the two different contexts where the term "book value" is used. Book value accounting method and mark-to-market accounting method refer to how individual assets are valued for the purpose of both income and balance sheet. The book value of a company refers to the value of all assets the company holds netted against liabilities. Of course, the book value, like everything else on the balance sheet, is calculated using the company's chosen accounting method. So in a company that uses mark-to-market accounting, the company as a whole still has a book value, and the book value is the sum of the marked-to-market values of all its assets. In this case, the book value of the company may be quite unrelated to the book value of its assets, since the balance sheet is marked to market. Book value accounting and mark-to-market accounting of assets both provide opportunities for manipulation. However, any such manipulation flows through both the income statement and balance sheet and affects earnings just as it affects the company's book value. Martin
hi, of course since the accounting of anything impacts both the BS and the income statement in equal manners, one can choose to focus on the income statement to attempt to detect manipulations... personally i like to look at both... agree its relatively easy to manipulate earnings as you mentioned and the internet bubble notably has greatly expanded on the realm of possibilities there, but i find its equally easy to manipulate depreciation charges & asset values in 'similar' ways, use write-offs and reincorporate them later, use leasing structures or more elaborate structures involving some measure of off-BS accting etc etc... wouldn't you agree?
Sure, but depreciation, write-offs, and lease payments all come out of earnings at some point. I'm not really saying anything controversial at all for those who understand accounting. I feel like we're in total agreement here. 1) It is impossible to manipulate asset values without at some point manipulating earnings. 2) "Book value" means something quite different in terms of accounting for individual assets and in terms of a whole company. Martin