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Evaluating the risk of substituting fixed-asset NBV for FMV

Nick Shannon (nick.shannon@vmghealth.com) is Managing Director, Capital Asset Valuation, VMG Health in Dallas.

Did you know that when comparing fair market value (FMV) to net book value (NBV), the difference in value could be as much as three times?

Medical equipment, fixed assets, and other tangible personal property (capital assets) are commonly a significant element in healthcare transactions. Capital assets represent a diverse range of tangible asset investment, from general office furniture, fixtures, and equipment used in a professional medical practice to sophisticated equipment and technology systems operated in hospitals, ambulatory surgery centers, imaging centers, and radiation therapy facilities.

When considering a potential transaction, the regulatory requirements with the Stark Law set a precedent of establishing FMV—defined as “opinion expressed in terms of money, at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts, as of a specific date”[1] —related to all components of a healthcare business that have financial relationships with physicians. Additionally, broader implications of a transaction may warrant support, for all parties involved, that asset value is consistent with current market levels. Depending on the healthcare business and facility, capital assets are often a material component of value when determining the following:

  • Capital asset FMV in support of compliance and financial planning for acquisitions, mergers, divestitures, and asset transfers;

  • Capital asset FMV in support of a broader business valuation;

  • Capital asset FMV in support of financial planning for federal tax purposes; and

  • Capital asset FMV in support of liquidations, bankruptcies, and collateral audits.

Likewise, there are often considerations for post-transaction closing and preparation where capital assets may play another important role, including capital asset fair value (FV)—defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”[2] —in support of financial reporting standards and requirements.

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