Tangible and Intangible Assets

Question 1

Considerations when valuing asset

Answer 1

• type of asset
• age
• how often used
• the reason for valuation
• availability of information

Question 2

Value in use

Answer 2

• value to the organization assuming it is continued to be used in the same way

Question 3

Highest and best use value

Answer 3

• for an asset with multiple uses, the highest value available for it

Question 4

Liquidation value

Answer 4

• net proceeds received on disposal

Question 5

Reasons to need to value assets

Answer 5

• lenders need to know value for collateral
• testing for impairment
• insurance claim
• tax reorganization

Question 6

Approaches

Answer 6

1) Replacement cost
2) income based
3) market based
** please see approach decision tree in notes **

Question 7

Replacement cost approach

Answer 7

• measure at current cost (not historical)
• value land and building separate
• used to calculate “floor value” because this is the total of costs paid, so replacement cost value = book value
• best for valuing highly specialized equipment and internally generated intangible assets
• does not reflect future economic benefits of the asset

Question 8

Income based approach

Answer 8

• use when asset is expected to generate cash flows
• consider timing/amount/riskiness of future income and the life of the asset
• income based approaches are best for situations where incremental cash flows earnings are identified
• when using measurement of value: its difficult to identify income directly related to each asset
• discounted/capitalized earnings approach: compare cash flows of the business holding the asset with a business whom doesn’t hold the asset
• free cash flows = after tax income - investment in capital assets - working capital

Question 9

Market based approach

Answer 9

• determining the value by referring to selling prices of similar assets
• best choice when adequate market data is available
• just because there is a comparable transaction does not mean there is enough information to use market based

Question 10

What approach to use for tangible assets

Answer 10

• replacement cost: use for any tangible asset, but mainly highly customized assets
• income based: use for assets that generate their own earnings (rental income)
• market based: use when adequate number of similar sales occurred in the market

Question 11

What approach to use to intangible assets

Answer 11

• replacement cost: use for early development of asset/no economic benefits
• income based: use when asset generates own income stream
• market based: use when asset trades in active market/adequate number of sales occured