Unit 4 Flashcards
Intangible Assets
Chapter 30
IAS 38
ASPE3064
What are the definition criteria for an intangible asset
It should meet at least one of these criteria :
1. Identifiability - s/b separable and arising from legal rights
2 FEB - Provides future economic value to the entity
3. Control -Entity controls the future economic benefits
What are the recognition criteria for initial measurment
- It should be probable that future economic benefits will flow to the entity
- The cost can be reliably measured
- Those acquired in a biz combination, it is assumed that the probability is met as long as the FV (cost) is known
What are the measurement criteria for an internally generated intangible assets
Reasearch cost - Expense
Development cost- capitalize when all met -
- Complete feasibility study
- Theres intention to complete
- Ability to use or sell
- Probable FEB
- Theres adequate technical, financial and human resources to complete
- Ability to measure expenses
What are the criteria for capitalizing intangible assets?
- Both the definition and recognition criteria must be met
- Establish it is in the development phase (6 criteria)
- Determine if the expenditure qualify to be capitalized
Criteria to capitalize develpoment costs for IA
- Technical feasibility
- Intention to complete
- Ability to use or sell
- Availability of resources
- Ability to measure expenditures
- Generates FEB
What are the criteria to the criteria to capitalize development costs of an IGIA
- Is the asset technically able to be completed
- Does the entity plan complete it
- When completed, does the entity have a use for it
- When in use, will it generate economic benefits
- Does the entity have the means to complete the development
- Does the entity know the cost directly attributable to the development be reliably measured
How are IAs subsequently measured
Those with finite life
1. Cost Method
- Determine useful life
- Amortize using SL or units of production
- Test for imparment annually
-2. Revaluation Method
- Only for IAs traded in an active market
Those with Infinite life (eg Goodwill)
- Not amortized but tested annually for impairment
How is Goodwill treated in IGIA
It is not considered an identifiable asset and so is only recognized when acquired in a business combination
Difference btw IFRS and ASPE for ASPE3064 / IAS38
Both - For purchased intangibles, it is assumed that future benefits exist (because of amount paid)
Both - internally generated brands, mastheads, publishing titles, customer lists, and items similar in substance CANNOT be capitalized
ASPE - Allows policy choice in development costs for internal projects. Could capitalize or expense
What should be included in the presentation and disclosure notes
- Whether useful lives are finite or infinite
- Amortization method used for finite lives
- Gross carrying amt, accumulated amortization at the beginning and end of the period
- Reconciliation of change in carrying amounts during the year
- Assets with indefinite useful lives, state the carrying amount and the reason for the assessment
- Aggregate amount for R&D for the period
- Clearly distinguish between IG assets and other intangible assets
Foreign Currency Transactions
Chapt 63
IAS 21
ASPE 1651
What are the steps to record FCTs
- Determine the functional currency
- Initial measurement
- Translate using the spot rate at the date of the transaction
- Txns occurring evenly overtime, use average rate - Subsequent measurement
a. Monetary- Closing rate on the SFP date
- Gain or loss to P or L
b. Non-monetary- If measured at historical cost - no update
- If measured at fair value - exchange rate at revaluation date (IFRS)
- exchange rate at balance sheet date (ASPE)
Presentation & disclosure requirements
- Functional currency used
- Amount of gain / loss in SCI
- If theres a change in functional currency , state old and new and rationale
Impairment of Assets
Chapt 31
IAS 36
Steps
- Determine level of asset grouping
- Identify when to test for impairment
- Determinde recoverable amount . IFRS - Higher of FV and value in use
- VIU - Discount estimated future cash flow from:
* Continuing use
* Ultimate disposal
- VIU - Discount estimated future cash flow from:
- Test for impairment and record loss
Steps - ASPE
- Determine level of asset grouping
- Independent or
- Asset Grouping level
- Identify when to test for impairment
- Only when there are indicators - internal
- external
- Only when there are indicators - internal
- Test for impairment
-If RA is lower that CA
- RA is undiscounted future cashflow - Record impairment loss
FV - CV* Loss **cannot** be reversed
Difference IFRS
- Identify CGU (Cash Generating Unit)
- Annual test or consideration of impairment
- Recoverable amount is discounted
- Write down to recoverable amount
- Recoverable amount can be reversed up to the lesser of the recoverable amount or CV had it asset not been impaired
ASPE
- Identify Asset grouping
- Monitor for indicators of impairment
- Recoverable amount is not discounted
- Write down to FV discounted
- Impairment losses cannot be reversed
Valuations - Asset Based Approaches
Finance
Chapt 30
Types of asset based valuation approaches
-
- Liquidation
- Forced
- Orderly - use NRV - Adjusted net asset approach
- For coys that are going concerns with no active operations - Holding coys
- Also used to calculate floor value of going concern coys with active operations
- Used for coys with active ops but no excess earnings / No goodwill - Replacement Value Approach
How is equity valued using the liquidation method
Proceeds of sale of assets
Less selling cost
less taxes
=
NRV
Less
Amount to settle liabilies
* if value is determined per share, then deduct personal taxes
How is equity valued using adjusted net asset approach
- Adjust the value of each balance sheet asset and liability to FMW
* include redundant assets net of redundant liabilities - Less selling costs and latent taxes (eg tax on capital gains)
- Less forgone tax shield (ie FMW > current tax values of the assets)
* Used mainly for entities that are holding companies with real estate i
How are businesses valued using the Replacement cost method
- Assets are adjusted to their replacement values
- Less liabilities and taxes arising due to the value replacement costs
* Common with insurance companies
What are the approaches to valuation
- Asset based
- Income based
- Market based
* A combination of approaches can always be used
Valuation steps for exam purpose - Income Approach
- Start with net income
- Adjust for accounting issues
- Normalize for unusual items
- Use multiplier to determine value
- Compare with price offer
Valuation steps for exam purpose -
Asset Approach
- Adjust assets & liabilities to fair value
- Adjust for accounting issues
- Subtract revised total liabilities from assets
- Use multiplier (if provided) to determine value
What are the asset based approaches
- Liquidation
1. Used when a coy is no longer a going concern. Two types:
2. Forced
3. Orderly - Valued with NRV (NRV means net of disposition costs/ taxes)
- Adjusted net asset
1. Going concern but no active operations. Mainly holding coys
2. Also for going concerns with active ops but no excess earnings
3. Floor value is used to calculate the value ie
4. FMV less disposition costs, liabilities and related taxes
** - Replacement cost**
1. Used for insurance purpose, individual assets, intangible assets
2. Actual replacement cost of the asset less liabilities, disposition costs and related taxes
When to use income based approach
- For coys with active operations and excess cashflows
- Income for all the approaches must first be normalized
- If an asset is to be valued, the related cashflows / earnings must first be singled out
What are the income based approaches
- Capitalized cash Flow
1. Used if historical cashflow of entity indicates future performance
2. A capitalization rate is applied to annual future cashflows - Discounted cash Flow
1. For start-ups because most times, their historical CF is negagtive
2. For entities whose historical CF is not indicative of future performance
- Reliable CF projections are discounted to get an initial value of the business
- Then as the expected CF steadies with a constant rate of change, the CF is discounted to get the terminal value of the business
Income based approaches contd
- Capitalized Earnings
1. Used if historical earnings is indicative of future earnings
2. Earnings are multiplied by a multiplier or divided by a capitalization rate - Discounted Earnings
1. Mostly used in mergers and acquisitions
2. Earnings are expected to be volatile before levelling out
3. Future earnings for each forecasted period are determined
4. Appropriate discount rates are applied to earnings for each forecasted period to get their PVs
Capitalized Cashflow steps
Normalized EBITDA
- Income taxes
- Sustainable capital inv net of tax shield
Div by capitalization rate
= Capitalized Cashflows
- PV of existing tax pools
+ Redundant assets - Liabilities
- Long term loans
= Equity Values
Discounted Cashflow Steps
PV of free annual cashflows
+ PV of residual / Terminal value
+ PV of existing tax shields not already included
= Enterprise value
- NRV of redundant assets less liabilities
- Outstanding long term debt
= Equity Values
What are the market based approaches
There are 2 methods
- Assets with active market
- Comparable transaction
How are they valued
- Used for going concerns when the information required to value the company is publicly available and reasonably comparable. Also used corroboratively with income based approach
- Use valuation multiple that is used for similar company of comparable size in the industry
- Apply the multiple to the EBITDA of the coy to get the market value
- ## For equity value, apply the multiple to the earnings of the coy
Formula -Terminal value using Adjusted Net Asset Method
TV =(Last yr estimated CF x 1.03) / (0.12-0.03)
0.12 = WACC
0.03 = Rate of growth
Formula Terminal DCF
[ Final year FCF x ( 1+perpetuity growth rate) / WACC- perpetuity growth rate) ]
Valuation with FCF into perpertuity
- Calculate terminal value from formula above and then
- Discount each year’s FCF and TV and calculating each PV
Formula - Equity value using DCF
Disxc
PV of Discretionary cashflow
+ Redundant Assets
- Redundant Liabilities
- Interest bearing debt
+ PV of tax shield
- Do not add value of working capital
Calculate a coy’s share price using market comparables
Firm value = EBITDA * EV/EBITDA
Equity value = Firm value - long term loan
Price per share = Equity value / total shares
Calculate a coy’s share price using EPS
The price = P/E ratio x EPS
P/E ratio = Industry P/E
EPS = (Earnings - Preferred dividend) # of shares
How to calculate normalized discretionary cashflow from a trend
- Get the normalized EBITDA from the statements
- Get average value from the normalized CF from all the yrs
- Remove tax, sustaining investment net of tax shield
Purchase, Expansion or sale of a business
Chapt 37
Pros and Cons of acquiring assets in a company
Advantages
- You can pick and chose which asset/ liability to acquire/ take up
- Tax basis of the assets acquired is known ie the acquisition price
Disadvantages
- Owner may withold some assets from sale
- The price paid for assets may be higher because you chose to take up no / limited liabilities
Pros and Cons of acquiring shares in a company
Advantages
- Can gain control of the coy by acquiring less than 100%, thereby reducing cost
- Retain existing legal structure
- Can use tax loss carryforwards
Disadvantage
- May have non controlling share holders. Must buy all assets and liabilities
- No tax change on the assets
- May have to replace management and employees
How to record different types of investment
Controlling interest (from 51%) - Consolidate
Significant influence - Equity Method
Passive - FVPL, FVOCI
Diverstiture- Spin off
That is, a coy splits into 2, generating a second independent entity
The shareholders in Coy A and same in coy B with proprotionate share holding
Diverstiture- Equity Carve out
A coy separates assets and liabilities to divest into a new corporation. It then sells a portion for cash, while retaining majority
