Adjusted net asset method intangible assets example

The asset accumulation method and the adjusted net asset method are both generally accepted business valuation methods of the asset-based business valuation approach. This is an example showing the recognition of an intangible asset. Other examples are tangible assets and negative goodwill.

An valuation expert is retained to estimate the value of 100 percent of the owners’ equity of Red Client Company (“Red”), as of December 31, 2016. The assignment is to conclude fair market value of the Red equity on a marketable, controlling ownership interest basis.

Let’s assume that the valuation expert decides to apply the asset-based business valuation approach and the adjusted net asset value method. The valuation expert is going to revalue the equity in the aggregate using the capitalized excess earnings method to conclude the total intangible value in the nature of goodwill.

Exhibit 1 presents the historical cost-based balance sheet for Red as of the December 31, 2016, valuation date. All financial data are presented in $000s.

Now, let’s assume that the valuation expert has worked with the company management, performed a reasonable due diligence analysis, and concluded that the next period normalized EBIT will be $9 million.

For purposes of this analysis, the valuation expert concluded that EBIT was the appropriate measure of operating income to use to apply the capitalized excess earnings method analysis.

The valuation expert has concluded that the appropriate fair rate of return on all of the tangible and intangible assets is 15 percent. The valuation expert selected this rate of return based on the Red WACC.

And, the valuation expert concluded a 0 percent expected long-term growth rate in excess earnings. Therefore, the valuation expert concluded a 15 percent direct capitalization rate.

Exhibit 2 presents the valuation expert’s capitalized excess earnings method analysis. In this application of the adjusted net asset value method, the valuation expert will not revalue any of the Red assets—either the recorded tangible assets or the unrecorded intangible assets. That is, the valuation expert will apply the capitalized excess earnings method analysis based on the Red GAAP basis balance sheet accounts.

 

 

Adjusted net asset method intangible assets example

Adjusted net asset method intangible assets example

Adjusted net asset method intangible assets example

Adjusted net asset method intangible assets example

 

 

 

 

 


Finally, the valuation expert prepared the adjusted net asset value method valuation-based balance sheet as of the December 31, 2016, valuation date. The valuation expert adjusted the GAAP-based balance sheet for the result of the capitalized excess earnings method aggregate asset revaluation analysis. This adjusted net asset value balance sheet is presented in Exhibit 3. Adjusted net asset method intangible assets example

Based on the simplified fact set in this illustrative example, the valuation expert performed the asset-based approach and the adjusted net asset value method to value the Red total equity. The valuation expert applied the capitalized excess earnings method analysis to conclude the aggregate asset revaluation amount to include in the adjusted net asset value method valuation. The valuation expert concluded $16,000 as the total asset revaluation. Adjusted net asset method intangible assets example

As presented in Exhibit 3, the valuation expert concluded $36,000 as the fair market value of 100 percent of the Red owners’ equity as of December 31, 2016. Adjusted net asset method intangible assets example

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