Meaning
Accounting techniques calculate the value of an equity interest based on the total assets minus total liabilities of the enterprise. The net asset valuation method is the standard approach used by Chinese tax authorities when a market price for the shares is unavailable. It provides a baseline for determining the fair value of a company during an equity transfer.
Calculation Logic
Financial statements from the most recent audit provide the data for the computation. Under the net asset valuation method, the total book value of all assets is reduced by the total outstanding debts. This results in the equity value that is attributed to the shareholders of the company.
Valuation Standard
Adjustments are made if the book value of certain assets deviates significantly from the current market price. When using the net asset valuation method, the tax bureau may require appraisals for real property or intellectual property held by the company. These adjustments ensure that the final value used for tax purposes matches the actual worth of the business.
Balance Comparison
The price paid in the transaction is compared to the result of this accounting exercise. If the sale price is lower than the value found by the net asset valuation method, the taxpayer must provide a justification for the difference. Failure to provide a valid reason may lead the tax bureau to adjust the taxable gain upward.
