Customer relationships valuation

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Customer relationships valuation is based on valuation model. Here such a valuation model is presented to value customer contracts and the related customer relationship and the non-contractual customer relationships, as per IFRS 3 Business Combinations.

References (to familiarise yourself with the subject):

Customer contracts and the related customer relationships
Non-contractual customer relationships
Order or production backlog

What are the inputs to the model?


Revenue – represents revenue from existing customer relationships for existing products. Includes contractual and non-contractual relationships (even those without current backlog or commitments). Separate valuation of a backlog revenue intangible asset can be considered if and when such backlog exists.

The model assumes a “market participant” point of view, … Read more

IFRS 3 Redefinition of a business

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IFRS 3 Redefinition of a business – In summary:IFRS 3 Redefinition of a business IFRS 3 Redefinition of a business

  • The IASB issued narrow-scope amendments to IFRS 3 to help entities determine whether an acquired set of activities and assets is a business or not.
  • The amendments clarify the minimum requirements to be a business, remove the assessment of a market participant’s ability to replace missing elements, and narrow the definition of outputs.
  • The amendments add guidance to assess whether an acquired process is substantive and add illustrative examples.
  • The amendments introduce an optional concentration test to permit a simplified assessment.
  • The amendments are effective for annual reporting periods beginning on or after 1 January 2020 and apply prospectively. Earlier
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Retirement Benefit Plans

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Retirement Benefit PlansRetirement Benefit Plans – The objective of IAS 26 is to specify measurement and disclosure principles for the reports of retirement benefit plans. All plans should include in their reports a statement of changes in net assets available for benefits, a summary of significant accounting policies and a description of the plan and the effect of any changes in the plan during the period.

Retirement benefit plans are normally described as either defined contribution plans or defined benefit plans, each having their own distinctive characteristics. Occasionally plans exist that contain characteristics of both. Such hybrid plans are considered to be defined benefit plans for the purposes of IAS 26.

For defined contribution plans, the objective of reporting Read more

What are related parties?

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What are related parties – Related parties are relationships in which one party has the ability to control or significantly influence the economic and operating decisions of another. Transactions with related parties are a common feature of business. Typically related party relationships include the following:

  • Enterprises controlled or controlling one another, such as subsidiaries and joint venturesWhat are related parties
  • Individuals having an interest in the enterprise that gives them significant influence over the enterprise, such as majority owners
  • Key management personnel responsible for planning, directing and controlling the activities of the reporting enterprise, including close members of families of these individuals

Parties are considered related when one of the parties has control over the other or is able to Read more

Market consistent measurement of options and guarantees

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Market consistent measurement of options and guaranteesMarket consistent measurement of options and guarantees – IFRS 17 will require stochastic modelling of financial options and guarantees (such as a guaranteed maturity value), which might not be a common practice in certain territories, as discussed in ‘Example – Stochastic and deterministic modelling‘.

Options and guarantees should be recognised and measured on a current, market consistent basis. All cash flows, including fixed, guaranteed and cash flows variable with underlying items, should be measured on a probability-weighted basis using market variables, where relevant, and considering all possible scenarios.

The measurement of options and guarantees will, in many cases, involve stochastic modelling or using a deterministic model, run multiple times, to reflect a range of scenarios Read more

Separation of Insurance Contracts

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Separation of Insurance Contracts – Before the entity accounts for an insurance contract based on the guidance in IFRS 17, it should analyse whether the contract contains components that should be separated. Insurance contracts create a bundle of rights and obligations that work together to generate a package of cash flows. Some types of insurance contracts only provide insurance coverage – e.g. most short-term non-life contracts.

However, many types of insurance contracts – e.g. unit-linked and other participating contracts – contain one or more components that would be in the scope of another standard if the entity accounted for them separately. Separation of Insurance Contracts

For example, some insurance contracts contain: Separation of Insurance Contracts

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Differential cash flow method

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Differential cash flow method – Cost-benefit analysis involves comparing the financial results of the different alternatives as well as carrying out “what if” analysis.

The “Incremental or Differential Cash Flow Report” allows you to add and subtract projects to generate the incremental cash flow or to combine projects.

The basic of Differential Cash Flows – Over the Project’s Life:

   Change in revenue Differential cash flow method

– Change in operating expenses Differential cash flow method

= Change in operating income before taxes

– Change in taxes Differential cash flow method

= Change in operating income after taxes

+ Change in depreciation Differential cash flow method

= Differential cash flow

The following example is for a manufacturing firm … Read more

Deferred tax assets Future tax profits

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The availability of future taxable profits – a problem in four parts Deferred tax assets Future tax profits

The best starting point for determining the availability of future taxable profits is a company’s own business planning cycle and resulting forecasts. Using the company’s forecasts to assess the value of assets with potentially significant impact is not a unique exercise for most telecom operators. Given the significant balances of goodwill, other intangible and tangible assets, impairment testing is an important element of their financial reporting process. Deferred tax assets Future tax profits

Impairment tests generally are based on approved budgets, which result from a robust budgeting process, and often external experts are involved throughout the impairment process. Often, Read more

Calculating the value of an acquisition

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Calculating the value of an acquisition – This is a detailed example of calculating the fair value of an acquisition, using a logical step by step approach and realistic assumptions and determinations based on transaction and market data. Identifying and valuing intangible asset(s) is a broad endeavor and requires careful consideration of; factors specific to each business, the transaction structure, identifying the primary income generating asset, determining the discount rates, estimating the useful lives for identified intangibles. Examples of such intangibles include customer contracts, trademarks, brands, etc.


The DealFortune, Inc. acquired M&P Company on January 1, 2017. Consideration was $30 million cash plus additional contingent consideration, as follows:


  • Below 1 million: Nil Calculating the
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Discount rates for intangible assets

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Discount rates for intangible assets – An important event in accounting for an acquisition in a Business Combination has become the recognition and measurement of intangible assets, other than goodwill.

In the past the difference between the consideration transferred (transaction, purchase or acquisition price) and the fair value of net assets acquired was simply goodwill in many countries.

With increasing transaction prices for acquiring – not so increased – values of net assets, goodwill as a percentage of the transaction price went sky high. Especially during the internet bubble in the late nineteen-nineties goodwill allocations went through the roof.

In the US long time accounting standards in respect of intangible assets (other than goodwill) exist from the … Read more