Valuation Techniques Used Under The Three Valuation Approaches – FAQ | IFRS

Valuation techniques used under the three valuation approaches

The following are examples of different valuation techniques used under the three valuation approaches (Market approach, Income approach and Cost approach), and examples of common usage of those techniques.

Market approach

Technique

Examples of common usage

Quoted price in an exchange market

Equity securities, futures

Quoted prices in dealer markets

-On-the-run US Treasury notes

-To-be-announced (TBA) mortgage- backed-securities

Market multiples derived from a set of comparable assets (e.g. a price to earnings ratio expresses an entity’s per-share value in terms of its earnings per share) or transaction price paid.

Unlisted equity interests

Matrix pricing

Debt securities similar to benchmark quoted securities

Income approach

Technique

Examples of common usage

Present value techniques

-Debt securities with little, if any, trading activity

-Unlisted equity instruments

Black-Scholes-Merton model or lattice model

Over-the-counter European call option or American call option

Multi-period excess earnings method: based on a discounted cash flow analysis that measures the fair value of an asset by taking into account not only operating costs but also charges for contributory assets; this isolates the value related to the asset to be measured and excludes any value related to contributory assets

Intangible assets, such as customer relationships and technology assets, acquired in a business combination

Distributor method (DM)

The DM is appropriate to use when another intangible asset (i.e., technology or trademark) other than the customer relationship asset is determined to be the primary asset of the company, while the customer relationship asset is determined to be the secondary asset.

Relief-from-royalty method

Intangible assets expected to be used actively (e.g. brands)

With and without method

Intangible assets, such as on-demand technology, determine the value of the business with technology versus without technology.

Greenfield approach

Valuation of start-ups using start-up costs, ramp-up and commercialisation pattern, margins and capital costs.

Differential cash flow model

This is more of a method to compare the financial results of the different alternatives as well as carrying out “what if” analysis.

Cost approach

Technique

Examples of common usage

Depreciated replacement cost (DRC) method: considers how much it would cost to replace an asset of equivalent utility taking into account physical, functional and economic obsolescence; it estimates the replacement cost of the required capacity rather than the actual asset

Factory plant and equipment

Adjusted net asset method

Aggregated revaluation of all of an entity’s total of net assets

More than one valuation approach or technique

An entity should consider, among other things, the reliability of the valuation approaches and techniques and the inputs that are used in the approaches and techniques. If a particular market-based approach relies on higher-level inputs (e.g. observable market prices) compared to a particular income-based approach that relies heavily on projections of income, the entity will often apply greater weight to the measurement of fair value generated by the market-based approach because it relies on higher-level inputs. [IFRS 13 61, IFRS 13 BC142]

An entity should maximize the use of relevant observable inputs and minimize the use of unobservable inputs. Therefore, higher-level inputs that are available and relevant should not be ignored. [IFRS 13 61]

Any, or a combination of, the approaches and techniques discussed for IFRS purposes can be used to measure fair value if the approaches and techniques are appropriate in the circumstances. However, when multiple valuation approaches or techniques are used to measure fair value (e.g. when valuing a reporting unit for impairment testing purposes), IFRS 13 does not prescribe a mathematical weighting scheme; rather it requires judgment. [IFRS 13 63]

In many cases valuation professionals produce an evaluated price that uses a market approach based on observable transactions of identical or comparable assets or liabilities and an income approach that is calibrated to market data.

When multiple valuation approaches and techniques are used to measure fair value, the approaches and techniques should be evaluated for reasonableness and reliability, and how they should be weighted. The respective indications of value should be evaluated considering the reasonableness of the range of values indicated by those results. The objective is to find the point within the range that is most representative of fair value in the circumstances. In some cases, a secondary method is used only to corroborate the reasonableness of the most appropriate valuation approach or technique. [IFRS 13 63]

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