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The Mirage of Book Values

We compared the book values of investments with the current market values of those investments and found that the former is below the latter

As per the Accounting Standard 13, non-current assets/long-term investments are measured at their purchase prices. Since the outlook for non-current assets is long, they are not adjusted for gains/losses as per their fair values/market prices in the balance sheet at the end of each year. A permanent reduction in the market value is only accounted for.

Due to this principle, in the companies in which investments form a sizable portion of the total assets, if the market value of investments is less than the book value, then the book value remains inflated.

We compared the book values of investments of some companies with the current market values of those investments and found that in certain companies the current market prices of the investments are below the book values of those investments. We also found what percentage such assets are of the total assets. The inquiry revealed the names of the companies given alongside. Long-term investments made by these companies have lost their value over time, but the balance sheets of these companies still record the original inflated book values. Such inflated book values may obscure the reality about the balance sheet strength of these companies. The impact will be, obviously, more pronounced in the companies where the inflated investments also make a significant portion of the total assets.

Companies with inflated book values

Diff as % of BVBV as % of TA
The Indian Hotels Company-52.120.17
IFCI-32.660.0589
Jai Corp-29.720.2095
Godfrey Phillips India-11.380.1673
FDC-4.210.1548
Dalmia Bharat-3.90.1328
Exide Industries-2.420.6005
Max India-1.650.8423
Deepak Fertilisers & Petrochem Corp-1.130.0675