From slides Flashcards
(106 cards)
1
Q
How are the following assets measured?
- Cash and Cash equivalents
- Short-term investments and marketable sec
- Receivables
- Inventories
- LT Tangible Assets
- Recorded Intangible assets
- Goodwill
- Other Intangibles
- LT debt securities
- Equity investment
A
- Cash and Cash equivalents - FV
- Short-term investments and marketable sec - FV
- Receivables - Quasi FV
- Inventories - Lower of COST or MARKET VALUE
- LT Tangible Assets - Depreciated historical cost
- Recorded Intangible assets - Amortized historical cost
- Goodwill - Historical cost
- Other Intangibles - Not (or Not fully) recorded
- LT debt securities - Some at FV
- Equity investment - Some at FV
2
Q
How are the following liabilities measured?
- Short term payables
- Borrowings
- Accrued and estimated liabilities
- Commitments and contingencies
A
- Short term payables - FV
- Borrowings - Approximate FV
- Accrued and estimated liabilities - Quasi FV
- Commitments and contingencies - Many not recorded
3
Q
Explain the FV Hierarchy
A
The FV of an asset depend on how it is defined. Three different levels:
Level 1 inputs: Market Valuation, quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date
Level 2 inputs: Relative valuation, inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Include quoted prices for similar assets or liabilities in active markets
Level 3 inputs: Intrinsic valuation, inputs are unobservable inputs for the asset or liability. Best information available is used, e.g. from the company
4
Q
The one-to-one principle
A
Fair values report value to shareholders only when shareholders’ welfare is determined solely by exposure to market prices
5
Q
The balance sheet matching principle:
A
Fair value applies to aggregated assets and liabilities employed together
6
Q
The information conservation principle:
A
when accounting informs about price, price cannot inform the accounting
7
Q
The no-arbitrage estimation principle:
A
“fair” value estimates obey no-arbitrage principles with respect to observed prices
8
Q
The truing-up principle:
A
To be “fair,” accounting for fair values trues up against actual transactions
9
Q
Fair value accounting done right should make it easier for investors to value companies, not more difficult.
Accounting principles should always follow these principles:
A
- Do no harm.
- Don’t overreach.
- Keep it simple.
- Less is more.
10
Q
IFRS 13 ( and SFAS157-Topic 820) specify
A
The “when” is determined by other IFRS, but no consistent framework
11
Q
Key changes from industrial paradigm to information paradigm
A
Examples:
- Historical cost to fair values
- Transaction focused to economic event focused
- Rules based to principles based
- Reliability to faithful representation
12
Q
What is goodwill?
A
Difference between the amount paid for the business acquired and the underlying equity acquired
13
Q
Examples of factors affecting GW, and how
A
Excess reserves (provisions) + Higher FV value (real estate) + Intangibles (patents) + Low profitability (restructuring needs) - Excess profitability + Synergies + Lucky buy - Overvalued assets - = Sum = GW
14
Q
Explain in words how an acquistion affects the BS
A
Example: An aquirer have 500 in debt financing and pays 500. In the acquirers balance sheet 500 will go to asset side as a new investment, 500 on liability side as debt. The consolidated balance sheet will have GW = Price - Equity value and all assets and liabilities of the target. Therefore, the balance sheet might grow substantially, in slide example, from 1000 -> 1850
15
Q
Calculation methods for GW? Procedure and results
A
Purchase Method:
►Concept one entity acquires another entity
►Assets/liabilities of the acquired entity are revalued to fair market values
►Difference (goodwill) is capitalized and (in earlier years) depreciated
Result: Lower future profits, higher equity -> lower return on equity
Pooling of Interest Method:
►Two entities pool their business (merge); no acquirer can be identified
►Assets/liabilities of both entities are taken over at (IFRS) book values
► Difference is charged directly to equity
Result: Higher future profits, lower equity -> high return on equity
16
Q
Accounting possibilities GW:
Capitalize and amortize over the income statement
A
► Old IFRS / US GAAP method; Swiss GAAP FER preferred solution
►Acquired goodwill is amortized and over time replaced with own generated goodwill
►In addition to possible interest costs, management is made financially responsible for the goodwill paid
17
Q
Accounting possibilities GW:
Direct allocation to equity
A
► Old continental European approach «German consolidation method»
►Conservative, prudent and consistent treatment with own generated goodwill
►No financial responsibility for management and too high return on equity
18
Q
Goodwill –Impairment Only Approach:
What is it and background
A
Goodwill is shown as an asset (with separate capitalization of other intangibles acquired) and only depreciated if permanently impaired (business is not performing as expected at the time of the acquisition)
► USGAAP since 1 January 2002; IFRS since 31 march 2004
Changed since it would have created a competitive accounting advantage for companies outside the US
(Compromise in the US because pooling of interest method was no longer allowed)
19
Q
Critical View –Impairment Only Approach
A
►
No scientific justification for the change in the US but a political compromise in view of the disallowance of the ″Pooling of Interest″
►
A remaining goodwill after a proper purchase price allocation (PPA) and separation of all other intangibles represents only excess earnings or expected synergies
-> Neither of those have a indefinite life; in fact in modern business nothing is indefinite
►
In the real business world, a goodwill impairment is normally booked too late and at that point in time for a too high amount (new management)
►
In a complex group, the business supporting the acquired goodwill can -after only a few years -no longer be located (mergers, restructurings etc.)
►
Impairment calculations (DCF) are very sensitive to parameters outside the control of management (interest/discount rate) and are far from being “precise”
20
Q
Influence of PPA on future profits
A
►
Through the purchase price allocation (PPA) future profits can be influenced despite all the modern IFRS/USGAAP rules
►Provisions (for restructuring) have a very high (positive) impact on the future profits
►Through the PPA in an acquisition, management was always tempted to solve own (restructuring) problems without a charge to the income statement
21
Q
Restructuring Provisions in an Acquisition: True restructuring issues at the time of the acquisition AND at the acquired company
A
►Is relevant for the determination of the purchase price
►Should therefor be booked as a provision in the PPA/Goodwill calculation
►Otherwise a badwill in the year of the acquisition and extraordinary expense one year later is recorded
(Under IFRS/US GAAP no longer allowed)
22
Q
Restructuring Provisions in an Acquisition: Future operating costs OR restructuring problems at the acquiring company
A
►Are not relevant for the determination of the purchase price and as a result not part of goodwill
►Such provisions should be built as expense in the income statement
(Under IFRS/US GAAP no longer allowed)
23
Q
What are the four measurement bases?
A
- Historical Cost
- Current Cost
- Realizable Value / Settlement Value
- Present Value
24
Q
Fair Value Definition (IFRS 13.9):
A
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
(Market based and not an entity-specific)
25
Previous FV definition in IAS:
The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
26
The transaction to sell the asset or transfer the liability takes place either (IFRS 13.16):
- Principal market: The market with the greatest volume and level of activity for the asset or liability
- Most advantageous market: The market that maximises the amount that would be received to sell the asset or minimises the amount that would be paid to transfer the liability, after taking into account transaction costs and transport costs
27
Active market IFRS 13
A market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis
28
Exit price IFRS 13
The price that would be received to sell an asset or paid to transfer a liability
29
Highest and best use
The use of a non-financial asset by market participants that would maximise the value of the asset or the group of assets and liabilities (e.g. a business) within which the asset would be used
30
Market participants are according to IFRS 13
- Independent
- Knowledgeable
- Able
- Willing
31
Characteristics of the asset or liability
- Conditions
- Location
- Restrictions
32
Price IFRS 13 FV definition
- Directly observable or
- Estimated using another valuation technique, IFRS 13.18,
- > Before transaction costs, IFRS 13.25
- > But includes transport costs, IFRS 13.26
33
The unit of account (stand-alone or group) to be determined in accordance with the IFRS that requires or permits the fair value measurement, e.g.:
- IAS36 states that an entity should measure the fair value less costs of disposal for a cash-generating unit when assessing its recoverable amount.
- In IAS39 and IFRS9 the unit of account is generally an individual financial instrument
34
IFRS 13 deals with?
- Non-financial assets
- Entity's own equity instruments
- Non-financial liabilities
- Financial liabilities
- Financial assets
35
Distinguishing between financial assets, non-financial assets and liabilities
- Non-financial assets (e.g. land) may have alternative uses
| - Financial assets and liabilities don’t!
36
Highest and best us for non-financial assets
- in most cases the CURRENT use
- Alternative uses considered, must be
physically possible,
legally permissible,
financially feasible
37
Valuation premise for non-financial assets
In-use valuation premise
| In-exchange valuation premise
38
Application to Liabilities and an Entity’s Own Equity Instruments: Non-performance risk
- the risk that an entity will not fulfill an obligation
- includes, but is not limited to, an entity’s own credit risk (credit standing)
- Guaranteed liability refer to the credit standing of the issuer
39
Application to Liabilities and an Entity’s Own Equity Instruments: Restrictions preventing a transfer?
- Adjustment, if the market would make an adjustment
- Different pricing for restrictions assumed
- > An asset’s restriction is seldom and relates to its marketability (thus lowers fair value)
- > A liability’s restriction is common and relates to the performance of the obligation (and is usually reflected in the price)
40
Application to Liabilities and an Entity’s Own Equity Instruments: Financial liabilities with a demand feature
The fair value (IAS 39/IFRS 9) cannot be less than the amount payable on demand, discounted from the first date that an amount could be required to be paid
41
Application to an entity’s own equity instruments
- Exit price from the perspective of a market participant
42
Application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk
Valuation premise for:
- Financial instruments that are managed on the basis of the entity’s net exposure to a particular market risk (i.e. interest rate risk, currency risk or other price risk)
- In-exchange valuation premise (IFRS 13.BC112 ff.)
- Not: in-use valuation premise (i.e. an entity cannot take into account how the fair value of each financial asset or financial liability might be affected by the combination of that asset or liability with other financial assets or financial liabilities held by the entity). (Exceptions other card)
43
Application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk (exceptions)
- Except when an entity measures the fair value of a group of financial assets and financial liabilities on the basis of price, IFRS 13.BC119
- The rationale
- To use the exception, an entity must provide evidence
44
Application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk (further requirements)
- Same RISK
- Same DURATION
- The entity may measure its net exposure to that market risk over the time period in which the market risk is offset
- However, grouping of particular financial assets and financial liabilities must not necessarily results in an entity having no basis risk
45
Fair Value at Initial Recognition
- Day 1 gain (or loss): if the relevant IFRS does not specify whether and, if so, where to recognize those amounts, the entity should recognize them in profit or loss
- IAS39 and IFRS9 state that an entity cannot recognize a day 1 gain or loss for a financial instrument unless its fair value is evidenced by a quoted price in an active market for an identical asset or liability or based on a valuation technique that uses only data from observable markets
- IFRS3 and IAS41 require the recognition of day 1 gains or losses even when fair value is measured using unobservable inputs
46
Valuation technique: To estimatethe price at which an orderly transaction would take place between market participants at the measurement date under current market conditions
Valuation technique:
- Market approach
- Income Approach
- Cost Approach
Subsequent measurement
Calibration adjustment
47
Market approach
Uses prices and other relevant information generated by market transactions involving identical or comparable (similar) assets, liabilities, or a group of assets and liabilities (e.g. a business)
48
- Cost Approach
reflects the amount that would be required currently to replace the service capacity of an asset (current replacement cost)
49
- Income Approach
converts future amounts (cash flows or income and expenses) to a single current (discounted) amount, reflecting current market expectations about those future amounts.
50
IFRS 13 uses a three-level fair value hierarchy, as follows:
Level 1 comprises unadjusted quoted prices in active markets for identical assets and liabilities. (market approach)
Level 2 comprises other (either directly or indirectly) observable inputs not included within Level 1 of the fair value hierarchy. (Market approach)
Level 3 comprises unobservable inputs (including the entity’s own data, which are adjusted if necessary to reflect the assumptions market participants would use in the circumstances). (Income and cost approach)
51
IFRS 13 Three-level fair value hierarchy, financial instrument example:
Level 1: financial instruments quoted in an active market;
Level 2: Financial instruments whose fair value is evidenced by comparison with other observable current market transactions in the same instrument (i.e. without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets; and
Level 3: financial instruments whose fair value is determined in whole or in part using a valuation technique based on assumptions that are not supported by prices from observable current market transactions in the same instrument (i.e. without modification or repackaging) and not based on available observable market data.
52
IASs 36, 38 and 41 stated that an active market is one in which
(i) the items traded in the market are homogeneous;
(ii) willing buyers and sellers can normally be found at any time; and
(iii) prices are available to the public.’
53
IAS 39 and IFRS 9 stated that an active market is one in which
‘quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis.’
54
Measuring fair value when the volume or level of activity for an asset or a liability has significantly decreased, name a few examples
-
There are few recent transactions.
-
Price quotations are not developed using current information.
-
Price quotations vary substantially either over time or among market-makers (egsome brokered markets).
-
Indices that previously were highly correlated with the fair values of the asset or liability are demonstrably uncorrelated with recent indications of fair value for that asset or liability.
-
There is a significant increase in implied liquidity risk premiums, yields or performance indicators (such as delinquency rates or loss severities) for observed transactions or quoted prices when compared with the entity’s estimate of expected cash flows, taking into account all available market data about credit and other non-performance risk for the asset or liability.
-
There is a wide bid-ask spread or significant increase in the bid-ask spread.
-
There is a significant decline in the activity of, or there is an absence of, a market for new issues (iea primary market) for the asset or liability or similar assets or liabilities.
-
Little information is publicly available (egfor transactions that take place in a principal-to-principal market).
55
Problem with level 3 in IFRS 13 hierarchy
Level 3 is inevitably subjective
-
The IASB concluded that concerns about the subjectivity of those measurements are best addressed by requiring enhanced disclosure for those measurements, IFRS13.BC173
-
Entity-specific measurement must be avoided(e.g. for entity-specific synergies)
-
All information that is reasonably available must be included (no exhaustive effort to obtain this information is required), IFRS 13.89, .BC175
56
Fair Value Measurement: Disclosure Requirements
- Recurring and non-recurring fair value measurements
- Information about fair value measurements categorized within Level 3 of the fair value hierarchy
(-> Disclose the methods and inputs used in a fair value measurement, including the information used to develop those inputs)
(-> Disclose quantitative information about the significant unobservable inputs used in a fair value measurement categorized within Level 3)
Valuation processes, including, for example, how an entity decides its valuation policies and procedures and analyses changes in fair value measurements from period to period
(-> Helps users to assess the relative subjectivity in the valuation)
Sensitivity to changes in unobservable inputs
(-> Similar to the disclosure requirement in IFRS 7.40 for the market risk of financial instruments)
(-> A narrative description about sensitivity provides users of financial statements with information about the directional effect of a change in a significant unobservable input on a fair value measurement)
Transfers between Levels 1 and 2 of the fair value hierarchy
(-> May help users of financial statements assess changes in market and trading activity)
When an entity uses a non-financial asset in a way that differs from its highest and best use
57
When IFRS 13 applies:
In the primary statement (B/S, I/S, CF/S, E/S) and secondary statement (notes)
IFRS 13 when another IFRS requires or permits fair value measurements or disclosures about fair value measurements (and measurements, such as fair value less costs to sell, based on fair value or disclosures about those measurements), e.g.
- IAS 39/IFRS 9 and other IAS
An asset or a liability is not measured at fair value in the statement of financial position but for which the fair value is disclosed:
- E.g. for financial instruments subsequently measured at amortized cost in accordance with IFRS 9 Financial Instruments or IAS 39 Financial Instruments: Recognition and Measurement and
- For investment property subsequently measured using the cost model in accordance with IAS 40 Investment Property
58
When IFRS 13 does not apply (measure first with IFRS 13 but later in subsequent)
Share-based payment transactions within the scope of IFRS 2 Share-based Payment
Leasing transactions within the scope of IAS 17 Leases
Measurements that have some similarities to fair value but are not fair value, such as net realisablevalue in accordance with IAS 2 Inventories and value in use in accordance with IAS 36 Impairment of Assets
59
Types of combinations and types of control
Obtaining direct control of assets
- Statutory merger -acquired company ceases to exist as a separate company
- Statutory consolidation -new corporation absorbs both companies; one of the two companies is identified as the acquirer
- Asset acquisition –acquirer buys an operation from another company
Obtaining indirect control of assets
- Stock acquisition -one company acquires most or all of the voting stock of another company; each firm continues as a separate legal entity
60
Motives for mergers and acquisitions
- Vary by nature (conglomerate, horizontal, vertical)
- Operating synergies (Economies of Scale/Scope)
- Financial synergies (debt capacity etc)
61
Business Combination –The Convergence Project (Objectives)
Principles and requirements for recognition and measurement of
- Identifiable assets acquired and liabilities assumed
- Non-controlling interests
- Goodwill or gain from a bargain purchase
62
Business Combination –The Convergence Project (Accounting method)
- Acquisition Method applies to all business combinations
- Reasons for rejecting the pooling method (pooling of interests allows for assets to be evaluated by book value rather than market value. This allows them the option to work without adding in goodwill)
63
Scope of IFRS 3R
All «business combinations», except
- Formation of a joint venture
- Acquisition of an asset or group of assets that does not represent a business; and
- Combinations between entities or businesses under common control
64
Core Principle IFRS 3R
Acquisition-date fair values
Assets and Liabilities under IFRS 3R:
- Identifiable tangible and intangible assets acquired, and the liabilities assumed at their fair value on the acquisition date
Measuring non controlling interest in the acquiree under IFRS 3R:
- At its fair value, allocating implied goodwill to the non controlling interest, or
- At its proportionate share of the acquiree's identifiable net assets (the only option allowable under previous IFRS3)
65
To minimize goodwill as a residual, IFRS 3 facilitates the recognition of assets and liabilities:
Recognition of assets and liabilities that had not been recognized by the acquireein its pre-combination financial statements:
- Recognition of acquired intangibles (e.g., patents, customer lists), even though internally developed
- In contrastto IAS 38, the reliable measurement of costs and the probability of future benefit to flow to the entity recognition criterion in IAS 38.21(a),(b) is always considered to be satisfied for intangible assets acquired in business combinations
- In contrast to IAS 37, a (contingent) liability is recognized in a business combination, even though the outflow of resources is less then probable (<50%)
66
Assets are defined as
"present economic resources":
-
(1) controlled by an entity, through an enforceable right or other means, as a result of past events, and
-
(2) from which future economic benefits are expected to flow to the entity” (IAS 38, Framework).
In addition, the asset must be capable of being measured reliably.
67
Liabilities are defined as
''present unconditional economic obligations"
The settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits”· (lAS37, Framework).
In addition, the liability must be capable of being measured reliably.
68
Applying the acquisition method requires:
(a) identifying the acquirer;
(b) determining the acquisition date;
(c) recognizing and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree; and
(d) recognizing and measuring goodwill or a gain from a bargain purchase
69
Identifying the Acquirer
The Usual Way - Primary criteria are the voting rights
- Owning more than 50% of the subsidiary’s outstanding voting stock (50% plus only 1 share will do it)
The Unusual Way
- Having contractual agreements or financial arrangements that effectively achieves control
- Additionally, all facts and circumstances (only IFRS, not in US-Gaap)
70
Control in business combination formula IFRS 10
Control = Power + Exposure to Variable returns + Link between power and returns
71
IAS 27 Control
Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than half of the voting power of an entity.
In assessing whether potential voting rights contribute to control, the entity examines all facts and circumstances that affect potential voting rights.
72
IFRS 10 Control
An investor, regardless of the nature of its involvement with an entity (the investee), shall determine whether it is a parent by assessing whether it controls the investee.
An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.
73
Major accounting issues affecting business combinations
1. The proper recognition and measurement of the assets and liabilities of the combining entities;
2. The accounting for goodwill or gain from a bargain purchase (negative goodwill);
3. The elimination of intercompany balances and transactions in the preparation of consolidated financial statements; and
4. The manner of reporting the non controlling interest
74
Consideration transferred may include
- cash, other assets, a business, a subsidiary of the acquirer, contingent consideration, ordinary or preference equity instruments, options, warrants, and member interests of mutual entities.
75
Goodwill calculation
+ Consideration transferred
+ Fair value of previously held equity interests
+ Fair value of noncontrollinginterests (optional only under IFRS)
-Fair value of net asset of acquiree
76
Difference Full-Goodwill and Partial Goodwill Method
Full GW, IFRS & US-Gaap:
Goodwill is allocated to both the controlling and non controlling interest
Partial GW, optional for IFRS, not allowed under US-Gaap:
Goodwill can be allocated only to the controlling interest
77
Bargain purchase (GW)
Negative goodwill is recognized as a gain (after verifying that the fair value allocation is appropriate).
78
Fair Value of Non controlling Interests
Since the acquirer typically pays a control premium, the fair value of the non controlling interest cannot be measured in relation to the purchase consideration that the acquirer transferred in exchange for to controlling interest (e.g., in an acquisition of 50.01% voting stock)
Fair Value must be determined based on
- > MARKET PRICES for equity shares NOT held by the acquirer, or, if not available, active market for the shares
- > By using a VALUATION technique (e.g., DCF) Per-share difference is likely due to a “noncontrollinginterest discount” (rational of an investor)
79
Using the DCF framework, there are four basic ways in which the value of a firm can be enhanced
The cash flows from existing assets to the firm can be increased, by either
- increasing after-tax earnings from assets in place or
- reducing reinvestment needs (net capital expenditures or working capital)
The expected growth rate in these cash flows can be increased by either
- Increasing the rate of reinvestment in the firm
- Improving the return on capital on those reinvestments
The length of the high growth period can be extended to allow for more years of high growth.
The cost of capital can be reduced by
- Reducing the operating risk in investments/assets
- Changing the financial mix
- Changing the financing composition
80
Ways of Increasing Cash Flows from Assets in Place
I.e. FCF increase
- More efficient operations and higher cost cutting, i.e. higher margins
- Divest assets that have negative EBIT
- Reduce tax rate: moving income to lower tax locales, transfer pricing, risk management
- Live of past overinvestment (CAPEX related)
- Better inventory management and tighter credit policies (NWC related)
81
The cost of capital can be reduced by
- Reducing the operating risk in investments/assets
- Changing the financial mix
- Changing the financing composition
82
Value Enhancement through Growth
Reinvestment rate * Return on capital = E(Growth)
Reinvestment rate:
- Reinvest in more projects
- Do acquisitions
Return on capital:
- Increase operating margins
- Increase capital turnover ratio
83
Identifiable Intangible Assets definition
Long-term assets other than financial instruments that lack physical substance. Examples: Goodwill, brand names, patents, trademarks, franchises, computer software, copyrights, permits, licenses, customer lists, …
Intangible assets are either developed internally or acquired from others, typically in a business combination. - Most internally-generated intangible assets are omitted from the balance sheet
- Acquired intangible assets are capitalized
84
Identifiable Intangible Assets recognition
Recognition Criteria, IAS 38
- Identifiability
- Control (power to obtain benefits from the asset)
- Future economic benefits (such as revenues or reduced future costs)
-> it is PROBABLE that the future economic benefits that are attributable to the asset will flow to the entity;
-> and Cost of the asset can be measured RELIABLY
(Both above are satisfied in a business combination)
85
Identifiable Intangible Assets: Identifiability
- is separable(capable of being separated and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract) or
- arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.
86
Intangible assets are classified as either?
Either finite-lived, indefinite-lived, or goodwill
- Goodwill is recognized only when acquired in a business combination
- Finite-life and indefinite-lived intangibles are recognized primarily when acquired in a business combination
- Indefinite-lived intangibles cannot be generated internally but can be acquired in transactions other than business combinations
87
Types of intangible assets
```
1.
Marketing-relatedintangibleassets
2.
Customer-relatedintangibleassets
3.
Artistic-relatedintangibleassets
4.
Contract-basedintangibleassets
5.
Technology-basedintangibleassets
```
88
IFRS classifies two types of basis for intangible assets
Intangible assets identified as having a CONTRACTUAL basis are those that arise from contractual or other legal rights. E.g. (trademarks, customer contracts, books, licensing, patent)
Those designated as having a NON-CONTRACTUAL basis do not arise from contractual or other legal rights but are separable. E.g. (customer lists, databases, unpatented tech)
89
Valuation Techniques
Market, Income & Cost Approach
90
market approach
uses prices and other relevant information generated by market transactions involving identical or comparable (similar) assets, liabilities, or a group of assets and liabilities (e.g. a business)
* Availability of market prices for similar assets on an active market (analogous pricing)
* Method of comparables(multiples)
91
cost approach
reflects the amount that would be required currently to replace the service capacity of an asset (current replacement cost)
Replacement cost (no active market required)
92
income approach
converts future amounts (cash flows or income and expenses) to a single current (discounted) amount, reflecting current market expectations about those future amounts.
* Present value techniques
* Relief-from-royalty Method
* Excess Earnings Method
* With-or-without-Method (=Incremental Cash-flow Method)
* Greenfield
93
Relief from Royalty, description, key inputs and frequent application
Estimates value by reference to the hypothetical royalty payments that would be saved through owning the asset, as compared with licensing the asset from a third party
Key Inputs
- Revenue forecast associated with the intangible asset being valued
- Expected life of the intangible (T)
- Notional royalty rate applicable to the intangible (RR)
- Discount rate (r)
- Tax amortization benefit (asset values, tax rates, tax amortization rates) (TAB)
Frequent Applications
- Brand (most common);
- Technology; and,
- Know-how.
94
TAB
- Tax amortization benefit (asset values, tax rates, tax amortization rates) (TAB)
95
Excess Earnings description
Description:
- PV of the earnings attributable to the subject intangible asset after providing for the proportion of the earnings that attribute to returns for contributory assets.
- In order to determine a fair return „on‟ and/or „of‟ these contributory assets, their value must be capable of being determined in priority.
96
Excess Earnings key inputs
Key Inputs
- Applicable revenue forecast
- Applicable expenses
- Contributory asset charges (“CAC”)
- Expected future tax rates
- Expected life
- Discount rate
- Tax amortization benefit (asset values, tax rates, tax amortization rates)
97
Excess Earnings frequent application
Frequent Applications
- Customer relationships
- Vendor relationships
- Technology
- IPR&D
- Order backlog
- Licenses
98
Cost description
Description
- Estimates the fair value of an asset by approximating its depreciated replacement cost, which would include all costs necessary to construct a similar asset of equivalent utility at prices applicable at the time of reconstruction.
- The cost approach is based on the premise that a prudent third-party purchaser would pay no more for an asset than its replacement cost.
99
Cost key inputs
Key Inputs
- All hypothetical costs that are needed to recreate the asset including materials and labour
- Adjustment factors to reduce the replacement cost to the functional, economic, and technological condition of the subject asset
100
Cost frequent application
Frequent Applications
- Licenses and permits;
- Certifications;
- Internally-generated software; and
- Workforce.
101
With or Without description
Description
- Estimates the fair value of an asset by comparing the value of the business inclusive of the asset, to the hypothetical value of the same business excluding the asset.
102
With or Without key inputs
Key Inputs
- Free cash flow forecast for business „with‟ asset
- Enterprise-wide discount rate
- Expected life of business
- Free cash flow forecast excluding subject asset
- Enterprise-wide discount rate excluding asset
- Expected period to replace asset + costs
- Tax amortization benefit (asset values, tax rates, tax amortization rates)
103
With or Without frequent application
Frequent Applications
- Non-competition agreements;
- Franchises; and
- Processes and technologies.
104
Greenfield description
Estimates the value of the asset based on the discounted cashflowsof a notional start-up business with no assets but the subject intangible.
105
Greenfield key inputs
Key Inputs
- Start-up cashflowforecast, including capital costs
- Expected ramp-up period and pattern
- Start-up-type discount rate
- Tax amortization benefit (asset values, tax rates, tax amortization rates)
106
Greenfield frequent application
Frequent Applications
- Non primary income generating assets
- Licenses and permits;
- Rights (i.e. Water, cutting, mining)
- Franchise agreements
