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This happens when a companies shareholders equity is negative. And this happens when the liabilities exceed the assets of the company.
Negative Equity is definitely not good in the financial books. However, if there is a comfort letter from the government entities that soft loans have been sanctioned for company in question, then an auditor does not have an issue signing off the audit report as going concern
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A negative book equity value means that liabilities exceed assets and can be caused by some few reasons, mainly like:
1- Accumulated losses over several financial periods.
2- Excess or large divined payments.
3- Borrowing funds to cover the accumulated losses.
4- Amortization of intangible assets.
When the liabilities of a company exceeds its assets.
The negative amount of owner's equity means that the Company's balance sheet will report liability amount greater than the amount of assets. Below are the some reasons for negative equity value:-
1) Accumulated losses
2) Borrowing money
3) Large dividend payment
4) Amortization of intangible assets etc.
Yes, a company's book equity value might be negative. Because the liability of the corporation exceeds its asset. There are many causes, such as the company's sustained large losses or its excessive debt load.
The negative amount of owner's equity also means that the company's balance sheet will report liability amounts greater than the amount of assets. The company could operate under those conditions if its assets are turning to cash before the liabilities need to be paid.
Equity Value is derived as : (Share Capital + Accumulated P/L + Free Reserves.)/ Number of Equity Shares.
However equity book value can be negative due to losses in the Buisness.
Example : Share Capital : USD 100,000 (100 equity shares of USD 1000 each)
Accumulated P/L : (USD 500,000)
Free Reserves : NIL
So Book Value of Equity : (100,000 + (-500,000)+0)/ 100
: (-400,000)/100
: -4,000/equity share.
Hence the Book Value of equity share is -4,000/equity share whose Face Value is USD 1000/-
When liabilities exceed assets resulting in negative book equity value.
