Valuation of Tangible Bank Assets
Valuing a bank as a business enterprise (as discussed in Chapter 15) does not necessarily require the valuation of each individual tangible asset owned by the bank. Nonetheless, it is appropriate in some situations to value some or all of the tangible assets. Three primary reasons to value specific tangible assets are to:
1. Determine a new taxable basis in a merger that uses purchase accounting rules (discussed in Chapter 9).
2. Compute the portion of the purchase price that is attributable to goodwill (also discussed in Chapter 9).
3. Gauge the extent of unrealized gains or losses on the balance sheet that could impact future earnings potential of the bank, particularly in loans and investments (a real-world complication discussed in Chapter 19).
Tangible assets to be valued fall into two categories: physical and financial. Physical tangible assets are those with true physical substance, such as furniture, fixtures, equipment, and premises. Financial tangible assets are those that involve a clear legal claim on future income or underlying assets, such as loans and investments.
The context in which tangible bank assets are valued is usually the fair market value in the current productive use of the asset—value in use. This is an important distinction because it assumes continuation of the current use of the property or asset. Value in use is not necessarily the theoretically highest value of the asset. For example, a bank that ...