Asset Accumulation Valuation Example – FAQ | IFRS

Asset accumulation valuation 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. Here is an example of the asset accumulation method:

A valuation expert has been retained to estimate the fair market value of the total equity of Brown Client Company (“Brown”) as of December 31, 2016. Let’s assume that Brown is a family-owned construction contractor company.

The valuation expert decided to use the asset-based valuation approach and the asset accumulation valuation method.

The Brown GAAP-basis balance sheet for December 31, 2016, is presented on Exhibit 1. All financial data are presented in $000s.

On this GAAP-basis balance sheet, tangible assets are recorded at historical cost less depreciation. In addition, no internally developed intangible assets are recorded on this balance sheet.

The valuation expert documented the asset accumulation method valuation analysis on Exhibit 2.

First, the valuation expert considered all of the Brown current asset accounts. Based on an analysis of the aged accounts receivable balance, the valuation expert revalued this account from $4,000 to $3,000.

In addition, the valuation expert restated the inventory balance from the $5,000 last-in, first-out (“LIFO”) accounting convention to a $6,000 current replacement cost value.

Second, the valuation expert considered all of the Brown real estate and Tangible personal property. The valuation expert used the cost approach and the depreciated replacement cost method to value both the real estate and the Tangible personal property.

Based on the depreciated replacement cost analysis, the valuation expert estimated the fair market value of the real estate to be $35,000—compared to a historical cost less depreciation (“HCLD”) of $30,000. And, based on the depreciated replacement cost analysis, the valuation expert estimated the fair market value of the Tangible personal property to be $20,000—compared to an HCLD of $10,000.

Third, the valuation expert separately valued the Brown unconsolidated ownership interest in its subsidiary, Green Roadbuilders (“Green”). The valuation expert used the market approach and the guideline publicly traded company (“GPTC”) method to value the total equity of Green at $20,000.

Brown owns 40 percent of the Green equity. Accordingly, the valuation expert valued the Brown ownership interest at $8,000. This $8,000 fair market value estimate represents a value decrement compared to the $10,000 carrying value of this investment.

Fourth, the valuation expert performed a comprehensive due diligence analysis to identify all of the Brown intangible real property and intangible personal property. This due diligence revealed the following intangible assets: internally developed computer software, customer contracts (for, let’s say, con­struction projects in progress), and a trained and assembled workforce.

Brown uses its internally developed and proprietary computer software for all of its administrative and project management functions. The valuation expert used the cost approach and the depreciated replacement cost method to estimate a $7,000 fair market value for this intangible asset.

Over the years, Brown has assembled an executive, technical, and operations staff of considerable experience and expertise. This assembled workforce is a valuable intangible asset. The valuation expert used the cost approach and the depreciated replacement cost method to estimate the $3,000 cost to recreate a workforce of comparable experience and expertise. Asset accumulation valuation example

At any point in time, Brown has several dozen customer construction projects in various stages of completion. The valuation expert used the income approach and the multi-period excess earnings method to value the customer contracts.

Working with company management, the valuation expert projected the remaining profit (measured as net cash flow) to be earned on each contract. The valuation expert present valued that future cash flow projection at the Brown 10 percent weighted average cost of capital (“WACC”). This analysis indicated a $5,000 fair market value for this customer-related intangible asset.

Finally with regard to intangible assets, the valuation expert used the income approach and the capitalized excess earnings method to estimate the fair market value of the goodwill. Asset accumulation valuation example

At this point in the analysis, the valuation expert had concluded the fair market value of the working capital assets (current assets minus current liabilities), real estate and Tangible personal property, and identifiable intangible assets. The valuation expert assigned a fair rate of return (based on the Brown WACC) to this total asset value to conclude the Brown required earnings.

The valuation expert compared the Brown actual earnings (measured as EBIT) to this required earnings level. Based on this comparison, Brown was generating a small amount of excess earnings. The valuation expert capitalized these excess earnings as an annuity in perpetuity to conclude a $2,000 fair market value for the goodwill.

Fifth, the valuation expert conceptually moved from the asset side of the balance sheet to the liability side of the balance sheet. The valuation expert next considered the current liability accounts.

The valuation expert concluded that the $4,000 recorded balance for accounts payable and the $4,000 recorded balance for the accrued expenses indicated the fair market values of those accounts. The analysis included the current portion of long-term debt in the valuation of the non-current liabilities.

Sixth, the valuation expert considered the notes payable and mortgage payable. The valuation expert concluded that the embedded interest rates on these debt instruments were sufficiently close to current market interest rates so that no liability revaluation was required. The valuation expert included the current portion of the long-term debt in the non-current liability account.

Seventh, the valuation expert performed additional due diligence procedures to identify and value any contingent liabilities. The valuation expert identified several litigation claims against Brown, all related to previous construction projects. Asset accumulation valuation example

The valuation expert worked with both company management and legal counsel to estimate expected future claim payment amounts, including probabilities and timing of payments.

The valuation expert calculated a present value of the mathematical (probability weighted) expectation of future claims payments of $10,000. The valuation expert recorded this $10,000 contingent liability value on the valuation balance sheet. Asset accumulation valuation example

Eighth, the valuation expert can calculate the net asset value by reference to the Exhibit 2 fair market value-basis balance sheet. At this point in the valuation, the valuation expert has concluded the fair market value of all of the total assets (both tangible assets and intangible assets) of $90,000. Asset accumulation valuation example

In addition, at this point in the valuation, the valuation expert has concluded the fair market value of all of the liabilities (both recorded and contingent) of $40,000. The difference between these two value indications (i.e., total asset value minus total liability value) is the fair market value of the total equity. Asset accumulation valuation example

As indicated on Exhibit 2, and based on this illustrative asset accumulation method analysis, the valuation expert concluded $50,000 as the fair market value of the Brown total equity.

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