Market value

IFRS 13 Relief from royalty method

IFRS 13 Relief from royalty methodOne method to determine the market value of Intellectual Property assets like patents, trademarks, and copyrights is to use IFRS 13 Relief from royalty method (also known as Royalty avoidance approach or Royalty Relief approach). This approach determines the value of Intellectual Property assets by estimating what it would cost the business if it had to purchase the Intellectual Property (IP) it uses from an outsider. Other valuation methods are provide here.

This approach requires the valuator to

  1. project future sales of the products that use the technology,
  2. determine an appropriate reasonable royalty rate, and
  3. determine either a present value factor or an appropriate discount rate.

The result is the present value of the Intellectual Property to the company. Read more

How is goodwill different from other intangible assets?

How is goodwill different from other intangible assets? An asset, which has no physical existence such as corporate intellectual properties (patents, trademarks, business methodologies and copyrights), trademarks, patents, software, goodwill and brand recognition are known to be an “Intangible asset”. So goodwill is and is not an intangible asset. Goodwill is a residual, unidentifiable, not separable asset. Intangibles are not that but…. How is goodwill different from other intangible assets

Separate identifiable intangible assets acquired

That is because identifiable intangible assets acquired in a business combination are recognised separately from goodwill [IFRS 3 B31]. An intangible asset is ‘identifiable’ if it arises from contractual or other legal rights or if it is separable [IAS 38 12]. Under certain criteria also … Read more

The Acquisition Method illustrated

The short case:

The company A Corp is purchasing all shares in B Corp. Control is acquired by A Corp, B Corp disappears from the economic entity, and B or B’s shareholders receive either A Corp stock or other property. This will result in a business combination which means A Corp’s acquisition of control over the business of B Corp. The Acquisition Method illustrated The Acquisition Method illustrated

The acquisition will be accounted for as a ‘purchase’, this means that the acquired assets will be entered on the acquirer’s (A Corp’s) books at their current cost to it and liabilities will be credited at their current values; i.e., the total purchase price will be allocated among the individual assets and Read more

Fixed income Accounting for expected credit losses

The ability to delay the recognition of credit losses on loans until there is evidence of a trigger event has been identified as one of the weaknesses in the incurred loss model outlined in Fixed income Accounting for expected credit lossesIAS 39 for Fixed income Accounting for expected credit losses. To tighten up the credit loss rules, a forward-looking impairment model has been built into IFRS 9 that is applicable for bonds classified as amortized cost or FVOCI. Reporting entities are required to make Expected Credit Losses (ECL) calculations for these bonds.

Generally, the loss allowance shall be calculated at an amount equal to the 12-month ECL unless there has been a significant increase in credit risk since the purchase date of the bond, at which … Read more

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:Read More »Adjusted net asset method negative goodwill example

Adjusted net asset method tangible asset 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 a revaluation to fair value of a tangible asset. Other examples are intangible assets and negative goodwill.

The valuation expert is again retained to estimate the value of 100 percent of the owners equity of the subject company, White Client Company (“White”), as of December 31, 2016.

Again, the valuation assignment calls for a fair market value standard of value and a marketable, controlling ownership interest level of value. White has the same GAAP-based balance sheet as did the hypothetical Red Client Company. Again, all financial data are presented in $000s.

Again, the valuation expert decides to apply the asset-based approach and the adjusted net asset value method to value the equity. The valuation expert decides to use the capitalized excess earnings method analysis to measure the appropriate total valuation adjustment to the GAAP-based balance sheet.

The valuation expert performs a due diligence analysis of the company and estimates that White will generate $9,000 of EBIT next year.

In this valuation, the valuation expert decides to use EBIT as the appropriate income metric to measure any excess earnings. And, the valuation expert performs a WACC analysis and concludes that 15 percent is the appropriate rate of return on the White assets.Read More »Adjusted net asset method tangible asset example