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Asset-Based Approach – Definition

Asset-Based Approach Definition

An asset-based approach is a way of determining the value of a business giving focus to the net asset value which is calculated by deducting total liabilities from total assets. There could be some challenges of deciding which of the company’s assets and liabilities to be calculated and also the worth to attribute to these assets.

A Little More on What is an Asset-Based Approach

The primary function of financial managers is to identify and maintain the value of a company because its rise or fall directly affects investors’ returns on investment.

Asset-based approach is used to evaluate a business that is preparing for a sale or liquidation. Equity value and enterprise value are some of the ways to maintain the value of a company. These two can also be used with the asset-based approach for business valuation. Common to these two is equity, in the absence of equity, asset-based approach is deployed to evaluate value. Assets based value can be used by private companies in some types of analysis and also by stakeholders in business valuation comparison.

Calculating Asset-Based Value

The asset-based value by default is referred to as the company’s book values or shareholders’ equity. The value is summed up by deducting liabilities from assets.  It is important to note that most times values of assets in the balance sheet may differ as a result of the time frame of the calculation or others. Also, some analysts may include certain insignificant assets in the evaluation which may differ from the one in the balance sheet.

Adjusting Net Assets

Having a conclusive asset-based valuation may be difficult because of the need to adjust net assets. Adjusting net assets is basically to identify the market value of assets and several factors affect this. Factors such as liabilities, balance sheet use of depreciation and intangibles. Market value adjustments can cause a fall or rise in the value of liabilities, this in turn affects the sum of the adjusted net assets. The evaluation in the balance sheet deploys depreciation to lower the value of assets, therefore, the asset-based value is not the same with the fair market value. Some other intangibles that are not given consideration by the company as a result of keeping trading secrets or company secrets on the balance sheet can indirectly affect market value.

An asset-based valuation is one of the methods used in determining the value of a company and it’s calculated by deducting liabilities from assets. To determine the net asset value of a company, the asset-based valuation needs to be adjusted.

Reference for “Asset-Based Approach”

The economics of poverty traps and persistent poverty: An assetbased approach, Carter, M. R., & Barrett, C. B. (2006). The economics of poverty traps and persistent poverty: An asset-based approach. The Journal of Development Studies42(2), 178-199. Longitudinal data on household living standards open the way to a deeper analysis of the nature and extent of poverty. While a number of studies have exploited this type of data to distinguish transitory from more chronic forms of income or expenditure poverty, this paper develops an asset-based approach to poverty analysis that makes it possible to distinguish deep-rooted, persistent structural poverty from poverty that passes naturally with time due to systemic growth processes. Drawing on the economic theory of poverty traps and bifurcated accumulation strategies, this paper briefly discusses some feasible estimation strategies for empirically identifying poverty traps and long-term, persistent structural poverty, as well as relevant extensions of the popular Foster-Greer-Thorbecke class of poverty measures. The paper closes with reflections on how asset-based poverty can be used to underwrite the design of persistent poverty reduction strategies.


Market participation by rural households in a low-income country: An asset based approach applied to Mozambique, Boughton, D., Mather, D., Barrett, C. B., Benfica, R. S., Abdula, D., Tschirley, D., & Cunguara, B. (2007). Market participation by rural households in a low-income country: An asset based approach applied to Mozambique. Faith and economics50, 64-101. Market participation is both a cause and a consequence of economic development. Markets offer households the opportunity to specialize according to comparative advantage and thereby enjoy welfare gains from trade. Recognition of the potential of markets as engines of economic development and structural transformation gave rise to a market-led paradigm of agricultural development during the 1980s (Reardon and Timmer, 2006) that was accompanied by widespread promotion of market liberalization policy agendas in Sub-Saharan Africa (SSA) and other low-income regions. Furthermore, as households’ disposable income increases, so does demand for variety in goods and services, thereby inducing increased demand-side market participation, which further increases the demand for cash and thus supply-side market participation. The standard process of agrarian and rural transformation thus involves households’ transition from a subsistence mode, where most inputs are provided and most outputs consumed internally, to a market engagement mode, with inputs and products increasingly purchased and sold off the farm (Timmer, 1988; Staatz, 1994).

Risk, vulnerability, and assetbased approach to disaster risk management, Vatsa, K. S. (2004). Risk, vulnerability, and asset-based approach to disaster risk management. International Journal of Sociology and Social Policy24(10/11), 1-48. Households are exposed to a wide array of risks, characterized by a known or unknown probability distribution of events. Disasters are one of these risks at the extreme end. Understanding the nature of these risks is critical to recommending appropriate mitigation measures. A household’s resilience in resisting the negative outcomes of these risky events is indicative of its level of vulnerability. Vulnerability has emerged as the most critical concept in disaster studies, with several attempts at defining, measuring, indexing and modeling it. The paper presents the concept and meanings of risk and vulnerability as they have evolved in different disciplines. Building on these basic concepts, the paper suggests that assets are the key to reducing risk and vulnerability. Households resist and cope with adverse consequences of disasters and other risks through the assets that they can mobilize in face of shocks. Asustainable strategy for disaster reduction must therefore focus on asset‐building. There could be different types of assets, and their selection and application for disaster risk management is necessarily a contextual exercise. The mix of asset‐building strategies could vary from one community to another, depending upon households’ asset profile. The paper addresses the dynamics of assets‐risk interaction, thus focusing on the role of assets in risk management.

An assetbased approach to the analysis of poverty in Latin America, Attanasio, O., & Székely, M. (1999). An asset-based approach to the analysis of poverty in Latin America. Poverty reduction remains one of the main challenges for Latin America at the end of the 20th century. Most of the countries in the region are classified as middle income by international standards, and yet they register poverty rates well above what would be expected given their GDP per capita. The reason for this “excess poverty” lies in the high inequality in the distribution of resources.

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