Finance - Valuation - Tangible and Intangible Assets

Question 1

How do you approach the tangible and intangible assets for valuation approach

Answer 1

• The approach and the factors to consider will vary, depending on the type of asset.
• No standard or specific mathematical formula

Question 2

Explain what value in use is and liquidation value

Answer 2

• Value in use: it represents the value of an asset to an organization, assuming that the asset continues to be used in its current capacity and function
• Liquidation value - net proceeds received by an owner for an asset as a result of voluntary liquidation or reorganization of business required to creditor

Question 3

What are 5 reasons for tangible and intangible asset valuation

Answer 3

1. Using the asset for security and requiring a market value to determine the amount of funds to advance
2. Determining values for investment properties measured using fair value model
3. Testing for impairment
4. Determining a selling or purchase price for an individual asset
5. Assessing economic damage related to infringement or litigation

Question 4

What are the three types of approach for valuation

Answer 4

1. Replacement cost approach
2. Income based approach
3. Market based approach
   Q
   Reliable and comparable market data available - Yes
   Use a market-based approach, Use - Quoted market price, and comparable transaction

Does the asset generate cash flow - no - REplacement cost approach
Yes - use income-based approach - (discounted and capitalized cash flow/ earnings)

Question 5

Explain the measurement of the replacement cost approach

Answer 5

• The value of the tangible or intangible asset is the cost of replacing it with an asset of similar or identical service capacity

Measurement
1. Direct material and direct labor
2. OPerating and admin overhead
3. Indirect costs such as consultant, subcontractor, marketing research, registration fees, construction levies, and permit
4. Opportunity cost related to an investment in time or cost of delaying the development benefit from tax saving

Question 6

What are the strengths and limitations of replacement cost

Answer 6

Strength
1. The valuation approach is readily available for tangible asset
2. Often used for internally generated intangible assets that have no identifiable income stream
3. Examples of intangible assets for replacement cost method can be appropriate include internally generated software program

Drawback
1. Rarely the tangible and intangible assets equal its economic benefit to the owner

Question 7

Explain the measurement of the income and cash flow-based approach

Answer 7

This approach use discounted expected future income streams that accrue from the use of the asset over its useful life

Measurement
Tangible assets such as real property, lease income rate, and related operating costs are used as either income or cash flow
Intangible asset - uses discounted future income streams that are expected to be generated by owner use of asset
Determining discount rate:
1. Alternative rate of return
2. General economic condition
3. Nature and condition of the industry, including competitive condition
4. Nominal rate or real rate

Question 8

What are the strengths and weaknesses of the income and cash flow approach

Answer 8

Strength
- Income-based approach - approach is appropriate when incremental cash flow or earnings can be identified
Drawback
- Ability to identify appropriate earnings or cash flows directly related to the valued asset.

Question 9

Explain the measurement discounted/ capitalized earnings - Tangible & Intangible assets

Answer 9

Measurement
Annual net operating income
1. Estimate the annual revenue or rental income to be received
2. Adjust for vacancies (rental income) and bad debt to determine net revenue
3. Deduct annual operating costs such as maintenance, utilities, and property

Method is employed
1. If the asset is assumed to have an indefinite life with stable operating income, apply a capitalization rate
2. Property assumed to have finite life, prepare a forecast of adjusted earnings for the future period
3. If an asset has an indefinite life, and operating income is volatile, then a discounted forecast of adjusted earnings is prepared for a volatile period

Intangible
The discounted earnings approach is based on expected future earnings rather than on cash flow
The excess earning approach determines the value of the intangible asset as their present value of earning attributable to the intangible asset
Contributory asser charge - economic rent, charge for return required on other asset

Drawback - to identify the other asset that generates earnings and determine separate return required

Question 10

Explain what the discounted/ capitalized cash flow approach - tangible asset & intangible asset

Answer 10

Measurement
1. Revenue earned from use of tangible asset
2. Direct cost required to maintain and operate the asset
3. Remaining years of useful life of the asset
4. Entity income tax rate

Intangible asset
Relief from royalty method
- Determines the value of an intangible asset by reference to the capitalized value hypothetical royalty payment that would be saved
- comparable royalty rate be determined.
- Would be appropriate to value intangible assets that could be licensed, such as patents, copyrights, brand names, trademark

Incremental cash flow
- Involves comparing the forecast cash flow that would be earned by business using intangible asset with cash flow that would be earned by business does not use the asset
- Determining value of intangible asset where cash flow and without the use of asset can be measured

Question 11

Explain market based approach

Answer 11

Measurement when asset not actively traded
- Estimate using comparable transaction approach. Assuming data can be found

Measurement - Land and building
- Properties are examined for difference from similarities to property being valued

Measurement - Machinery and equipment

Strength
- Most reliable approach when adequate and reliable transaction data for similar or identical assets are available

Limitation
- Very few or no transaction involving identical or sufficiency similar asset for which price information is available