Adjusted Net Asset Method Negative Goodwill Example – FAQ | IFRS

Adjusted net asset method negative goodwill 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 resulting in the recognition of negative goodwill. Other examples are intangible assets and tangible asset.

The valuation expert is again retained to estimate the value of 100 percent of the owners’ equity of a company as of December 31, 2016. In this example, the company is called Blue Client Company (“Blue”).

Again, the assignment calls for a fair market value standard of value and a marketable, controlling ownership interest level of value.

The Blue December 31, 2016, historical cost basis balance sheet is again the same as the Red December 31, 2016, historical cost basis balance sheet. All financial data are presented in $000s.

The valuation expert again decides to apply the asset-based business valuation approach and the adjusted net asset value valuation method to conclude the Blue total equity value.

The valuation expert performs the same due diligence analysis of the company and concludes the same valuation variables used in the prior two examples with regard to WACC, expected long-term growth rate in excess earnings, and direct capitalization rate.

As with the White analysis, the valuation expert has the opportunity to discretely appraise certain of the Blue asset categories. Using the same market approach analysis, the valuation expert values the inventory at $6,000. And, the company management provides the valuation expert with current fair market value appraisals of the property, plant, and equipment.

The Blue land is valued at $12,000 using the market approach, and the Blue building is valued at $14,000 using the cost approach.

The only difference between the Blue fact set and the White fact set is that, this time, management provides the valuation expert with a $30,000 appraisal for the Blue equipment. That $30,000 fair market value conclusion is based on a cost approach and an RCNLD method analysis.

The valuation expert used the inventory and the tangible asset valuations in the adjusted net asset value method analysis. The valuation expert did not have access to any intangible asset valuations with regard to Blue.

Based on the Blue historical cost balance sheet and the current valuations for the Blue inventory and tangible assets, the valuation expert performed the capitalized excess earnings method analysis summarized in Exhibit 6:

Since the “excess earnings” results in an income shortfall, the result of the capitalized excess earnings method analysis indicates the existence of economic obsolescence at Blue. The valuation expert will have to reflect the economic obsolescence by recognizing a proportional value decrease in all tangible and intangible assets that were valued by the application of the cost approach.

In the Blue valuation, none of the working capital accounts are valued by reference to the cost approach. And, no identifiable intangible assets were valued in the Blue illustrative example. Therefore, the valuation expert considered the Blue tangible asset accounts.

The Blue land was valued by reference to the market approach, so no economic obsolescence adjustment is necessary to the land value. The buildings and equipment were both valued by the application of the cost approach and the RCNLD method.

Therefore, the valuation expert will have to make an economic obsolescence adjustment to the building and equipment values. This economic obsolescence adjustment is summarized in Exhibit 7.

Based on the above-summarized allocation of economic obsolescence, the final fair market value indication for the buildings is $13,700 and the final fair market value indication for the equipment is $29,300. The valuation expert can use these final value conclusions in the adjusted net asset value method analysis.

After this recognition of economic obsolescence, the capitalized excess earnings method analysis will conclude no positive intangible value in the nature of goodwill—and no negative goodwill related to a capitalized income shortfall.

Finally, the valuation expert prepared the adjusted net asset value method valuation-based balance sheet for Blue as of the December 31, 2016, valuation date. The valuation expert adjusted the GAAP-based balance sheet for both:

  1. the results of the separately valued individual asset accounts and
  2. the conclusion of the capitalized excess earnings method analysis (requiring an individual asset value adjustment for economic obsolescence).

The Blue adjusted net asset value method balance sheet is presented in Exhibit 8.

Based on the simplified fact set in this Blue illustrative example, the valuation expert performed the asset-based approach and the adjusted net asset value method. The valuation expert separately valued certain working capital and tangible asset assets. The valuation expert applied a capitalized excess earnings method analysis to collectively revalue the remaining asset accounts.

Based on the capitalized excess earnings method analysis, the valuation expert could not identify any intangible value in the nature of goodwill. Rather, the valuation expert quantified negative goodwill, indicating the existence of economic obsolescence. The valuation expert adjusted the value of the cost-approach-derived asset accounts for the recognition of this economic obsolescence.

Based on the capitalized excess earnings method analysis (after the recognition of economic obsolescence), the valuation expert concluded $0 intangible value in the nature of goodwill. And, based on the adjusted net asset value method valuation, the valuation expert concluded a $36,000 fair market value for 100 percent of the Blue owners’ equity as of December 31, 2016.

Adjusted net asset method negative goodwill example

Adjusted net asset method negative goodwill example

Adjusted net asset method negative goodwill example

Adjusted net asset method negative goodwill example

Adjusted net asset method negative goodwill example

Adjusted net asset method negative goodwill example

Adjusted net asset method negative goodwill example

Adjusted net asset method negative goodwill example

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