What is Adjusted Book Value?

Book value of equity, also known as theoretical book value, is a valuation process in which a company's total assets are deducted from intangible assets and liabilities. 

For example, suppose the company's assets are equal to 1,000,000 USD, whereas the liabilities are equal to 900,000 USD. The company's Book Value is equivalent to 100,000 USD in that case.

The Adjusted Book Value, also known as modified book value, assumes that the book value of the assets and liabilities might not correctly measure their actual values.

To illustrate, we can examine the loans of the company. Suppose the company took a loan of 200,000 USD five years ago with an interest of 1% a year. Suppose also that the interest rate has increased, and the company now can take a similar loan with 4% a year. The loan's value should be re-evaluated as described in the company's balance sheet.

How to calculate the adjusted book value

The formula for calculating the adjusted book value is: 

Adjusted book value = adjusted asset - adjusted liability. 

In order to adjust the value of the assets and the value of the liabilities, the value of each of the items in the balance sheet must be examined - both on the assets and the liabilities sides.

For example - if a firm has a plant - to adjust the value - it must be examined how much it will cost to build a similar plant. Because the fixed assets in the balance sheet are recorded in historical values ​​- there is a chance that the value in the balance sheet does not express the correct value of the plant.