Valuation Of Intangibles On Acquisition – FAQ | IFRS

Valuation of Intangibles on Acquisition

THE CASE: Shockwave Corporation

  • Shockwave Corporation is the largest satellite radio provider in the country. Shockwave commenced operations five years ago when the government granted satellite spectrum licenses to four start-ups seeking to cultivate a then-burgeoning industry. Since that time, precipitated by the accelerating wireless data needs of telecommunication industry technology, the government has stated that it will not be licensing any new spectrum for satellite radio but may approve the sale or transfer of existing spectrum.
  • Shockwave generates its revenue from monthly subscriptions to consumers sourced via a direct retail sales channel (i.e. direct mail, print and television advertisements, billboards, and retail in-store kiosks).
  • Shockwave does not manufacture the satellite radio receivers used by consumers but transmits signals that can be received by a unit once the unit is registered/activated as a Shockwave unit.
  • After five years of research and development activities, Shockwave developed a proprietary software technology for the transmission of „on-demand‟ radio content. As a result, Shockwave created six new on-demand premium subscription stations exclusively broadcasting educational programs covering Parenting, Finance, History, Motivational topics, Biographies, and Cooking. This premium service is only offered to customers that are on a „regular subscription‟, and are not available separately. The success of this novel business was immediate, generating incremental revenues of approximately $45 million last year.
  • Most of Shockwave‟s „regular‟ music and talk radio content is acquired from third-party sources, based on normal recording industry royalty-based pay scales. However, for the exclusive broadcast on it’s premium „on-demand‟ channels, Shockwave produced an archive of over 1,000 twenty- to sixty-minute proprietary programs protected by copyright created via internal publishers and third-party consultants (i.e. doctors, professors, and professionals).
  • Two of Shockwave‟s competitors operate in the B2B space, providing satellite radio content to the airline, and commercial real estate industries, respectively. These competitors have unbranded product offerings.

On January 1, 20×1, the shares of Shockwave were acquired for $0.8 billion. The net debt and tangible assets acquired approximated $0.4 billion and $0.5 billion respective. The Purchaser would like to attach a fair value to Shockwave’s material identifiable intangible assets for IFRS financial reporting needs.

THE CASE – Historical Operating Results

R&D = Research & Development | S&M = Sales & Marketing |G&A = General and Administrative (or Overhead) | EBITDA = Earnings before Interest Tax, Depreciation and Amortisation |EBIT = Earnings before Interest and Tax | Capex = Capital Expenditure | PP&E = Property, Plant and Equipment | COS = Cost of Sales

THE CASE – Acquisition Forecast

R&D = Research & Development | S&M = Sales & Marketing |G&A = General and Administrative (or Overhead) |EBITDA = Earnings before Interest Rax, Depreciation and Amortisation | EBIT = Earnings before Interest and Tax |Capex = Capital Expenditure | WACC = Weighted Average Cost of Capital

THE CASE – Background Information

S&M = Sales & Marketing |R&D = Research & Development | B2B = Business-to-Business trading |G&A = General and Administrative (or Overhead)

THE CASE – Tradename – Relief from Royalty

WARA = Weighted Average Return on Assets | TAB = Tax Amortisation Benefit

THE CASE – On Demand technology – With and Without

WACC = Weighted Average Cost of Capital | COGS = Cost of Goods Sold |  G&A = General & Administrative (or Overhead) |S&M = Sales & Marketing | TAB = Tax Amortisation Benefit

THE CASE – On Demand technology – Excess Earnings

WARA = Weighted Average Return on Assets | S&M = Sales & Marketing | CAC = Contributory Asset Charges |G&A = General & Administrative (or Overhead) | TAB = Tax Amortisation Benefit

THE CASE – On Demand technology – Finite Life

WARA = Weighted Average Return on Assets | S&M = Sales & Marketing | CAC = Contributory Asset Charges |G&A = General & Administrative (or Overhead) | TAB = Tax Amortisation Benefit

THE CASE – Customer relationships – Excess Earnings

– Customer Contributory Asset Charges

WARA = Weighted Average Return on Assets

THE CASE – Broadcast license – Greenfield Approach

THE CASE – Program content – Cost Approach

TAB = Tax Amortization Benefit

THE CASE – Assembled workforce – Cost Approach

FMV = Fair Market Value | TAB = Tax Amortization Benefit

Reasonability Check

Ѵ Trade names are the most valuable asset, followed by customer relationships, then technology

Ѵ Goodwill rate of return is above intangible rates of return Valuation of Intangibles on Acquisition

Ѵ Goodwill rate of return is consistent with a start-up type rate of return for the industry Valuation of Intangibles on Acquisition

Ѵ The Technology is twice as valuable as its original cost Valuation of Intangibles on Acquisition

Ѵ Required rates of returns for all assets are consistent with their risk profile Valuation of Intangibles on Acquisition

Ѵ Goodwill approximates 10% of the purchase price (i.e. why pay for goodwill?) Valuation of Intangibles on Acquisition

 

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