CHAPTER Purchase Price Allocation and Intangible Assets 8.1 What Is Purchase Price Allocation? TERS 3 requires that a business combination shall be accounted by applying the acquisition method, whereby as at the acquisition dare, the acquirer, subject to recognition conditions, shall «recognise and measure the identifiable assets (including intangible assets) ac- quired, the liabilities assumed at their fair values © fecognise and measure any non-controlling interest in the acquiree either at fair valuc or at the non-controlling interest’s proportionate share in the recog- nised amounts of the aequiree’s identifiable net assets; and + recognise and measure goodwill or gain from a bargain purchase (normally referred to as negative goodwill by valuers). In practice, the process of applying the acquisition method to measure identifiable assets and liabilities as well as non-controlling interests und goodwill in a business combination is known as purchase price allocation (PPA).! Business Combination and Acquirer IFRS 3 defines business combination as a transaction or other event in which an acquirer obtains control of one or more businesses.? In a business combination, 12° Ppa is also required for investment in an associate ora jaint venture (including when a subvidiary Becomes 2" rea ti ea jinn venture duc to the paren gemnpany’s lows of controll. For guidance, refer to 2017 IFRS Stancsés ible Book) ~LAS 28 paragraph 32 and TFRS 10 paragraphs 25-26. 2. For guidance on the identification of business combination, particular types of business combinations a fh aeeearsmot business, refer to 2017 IFRS Standards (Bluc Book) ~—IERS 3 paragraphs 41-44 and BS-B12 155156 © CHAPTERB =» Purchase Price Allocation and Intangible Assets an acquirer is the entity thar obtains control of the acquiree as at an acquisition date, According to IERS 3, such obtaining of control by an acquirer can be done in ious ways such as transferring cash, cash equivalents or other assets, incurring, liabilities or issuing equity interests. Fair Value of Identifiable Assets and Liabilities in a Business Combination Ic is important to note that fair value measurement should be in accordance with TERS 13 except for the measurement of deferred taxes (IAS 12), employce benefits (IAS 19), share-based payment transactions (IFRS 2), assets held for sale (IERS.5), contingent liabilities, indemnification assets and re-acquired rights which shall be in accordance with corresponding IFRSs and/or IFRS 3 (where applicable} Intangible Assets Under IFRS 3,2 ble asset is defined as ‘an identifiable non-monetary as- set without physical substance’. From a business perspective, intangible assets to- gether with other financial and tangible assets will form the shape and business of an entity. Therefore, intangible assets play an important role in the success of the business and normally are key drivers of the entity's earnings. Intangible as- sets such as customer relationships, patents and know-how are developed inter- nally by the acquire and might not be recorded in the acquiree’s balance sheet but expensed off in the income statement. However, such intangible assets may be identified and recognised in the acquirer's accounts as a result of applying IFRS 3. Hence, the PPA exercises this will be discussed further in Section 8.2. identification of an intangible asset is a very important pracess for a Non-Controlling Interest Goodwill Non-controlling interest is defined by IFRS 3 as ‘the equity ina subsidiary not attributable, directly or indirectly, to a parent’. According to IFRS 3, a non- controlling interest in an acquiree arising from a business com| sured at its fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets as at the acquisition date. The determination of fair value of a non-controlling interest is similar to the valuation of a minority stake of a business taking into account the guidelines under IFRS 13. A waluer espe- cially has to factor in any premium or discount (e.g., discount for lack of control) thar marker participants might consider in pricing the non-controlling interest. tion can be mea IERS 3 defines goodwill as ‘an asset representing the future economic benefits arising from other assets acquired in a business combination that are not indi- vidually identified and separately recognised’, IFRS 3 further explains that good- will as of the acquisition date is measured as the excess of (a) over (b) as shown below:that is 3. Any portion of the acquirers share-based payment awards exch: uded in consideration rranslerred in the business combi 8.1 What Is Purchase Price Allocation? | 53 (a) the aggregate of (i) the consideration transferred measured at fair value,’ which shall be sum of the acquisition-date fair values of the assets transterre acquirer, the liabilities incurred by the acquirer to former owners of acquirce and the equity interests issued by the acquirer; (ii) the amount of any non-controlling interest in the acquiree measured at either its fair value or at the non-controlling interest’s proportionare share of the acquirce’s identifiable net assets as at acquisition date (it any}; and, (iii) ima business combination achieved in stages, the acquisition-date fair value of the acquirer's previously held equity interest in the acquiree (it (b) the nct of the acquisition-dare amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with IFRS 3. If the calculation of goodwill results in a negative amount (i.e. the excess (b) over (a)), a gain on such a bargain purchase shall be recognised by the acquirer in the income statement as of the acquisition date. Bargain purchases are common in a forced liquidation or distressed sale where the owners of the companies want to sell their business quickly for cash, Accordingly this may lead to a price that is less, than fair value. Negative goodwill can also be duc to errors made by the acquirers or valuers in measuring the fair values of the consideration paid for the acquisi- tion, the assets acquired or the liabilities assumed. Therefore in order to mitigate errors (if any} that may occur during the initial measurement exercise when the resultant calculation of goodwill is negative, the standard requires the acquirer + perform a review of the identification process for all of the assets acquired and all of the liabilities assumed in the related business combination. If such a review results in additional identified assets or liabilities, the acquirer shall recog nise and measure those additional items at their acquisition-date fair values; and * to review the procedures used to measure other PPA items including other identifiable assets acquired, identifiable liabilities assumed, non-controlling in- terest in the acquiree (if any), the aequirer’s previously held equity interest in the acquiree (if any) and the consideration transferred. Example 8.1 illustrates a simplified case ofa PPA exercise and goodwill calculation, Example 8.1 PPA and goodwill calculation A Ltd (‘Co A’) acquired 70% interest in B Pte Ltd (‘Co B") as at 31 July 2016 for a cash consideration of $4.6 million. Book value of Co B’s net assets as at 31 July 2016 amounted to $2.45 million, Co A engaged an independent valuer to perform the valuation of Co B's acquired assets, liabilities and non-cantrolling interest in Co B for the purposes of complying with IFRS 3. Non-current assets including property, plant and equipment are valued at $4.70 million. The management of Co A has identified the trade name, customer relation- ships, distribution agreements and order backlog as acquired intangible assets in Co B the acqusiree’s employees h IFRS god for awards held ition shall be measured in agcordance-w 2 Share-based Payment158 CHAPTER8 + Purchase Price Allocation and Intangible Assets TABLE 8.1 Summary of Assets Acquired and 1s Assumed inCoB (s000) Book vatue Fai value Intangible assets Trade name 790 Customer relationships 540 Distribution agreements 460 Order backlog 120 1,910 Non-current assets 3,700 4,700 Current assets 1,600 1,600 Current liabilities (750) (750) Non-current liabilities (2,100) (2,100) Deferred tax arising from fair value adjustment = (490) Net assets 2.450 4,870 The total valuation of these intangible assets is assessed at $1.91 million, The fair value of the net asset of Co B as at 31 July 2016 is $5.36 million (excluding fair value adjust- ments of $0.49 million for deterred tax liability). Non-controlling interest is fair valued at $1.60 million at 31 July 2016. Deferred tax liability arising from fair value adjust- ments is assessed at $0.49 million. Table 8.1 summarises the fair value of assets acquired and liabilities assumed by Co A. As shown in Table 8.2, the total purchase consideration ($6.20 million) is the sum of the fair value of the consideration for 70% equity stake ($4.6 million) and the fair value of the non-controlling interest of 30% stake ($1.6 million). Goodwill ($1.33 million) in relation to the acquisition ef 70% interest in Go B is calculated based on the difference between the total purchase consideration (6.20 m and the fair value of net assets ($4.87 million). The PPA illustrative example can be summarised in Figure 8.1 TABLE 8.2 Calculation of Goodwi eS eee (s000) Far vatue Fair value of the consideration transferred for 70% interest inCoB 4,600 Fair value of the non-controlling interest in CoB 1,600 Total purchase consideration 6,200 Fair value of net assets (4,870) Goodwill 1,3308.2 How Do We Identify Intangible Assets? 159 Pre-PPA Post-PPA Total Purchase Consideration = (s8.20m) Fair Value of f Net Assets ($4.87) Net Asset ($2.45m) 000) Intangible assets Non-current assets. Deterred tax arising from fair value adjustment Total FIGURE 8.1 Purchase Price Allocation 8.2 How Do We Identify Intangible Assets? An intangible assets identifiable if it meets the identifiability criteria, which are either the contracrual-legal criterion or the separable criterion. IAS 38 and IFRS 3 explain: © Contractual-legal criterion refers to ‘contractual or other legal rights, regard- less of whether thase rights are transferable or separable from the entity or from other rights and obligations’; and © Separable criterion means that an acquired intangible asset “is capable of be- ing separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifi- able asset or liability, regardless of whether the entity intends to do so”. Based on the above explanation of LAS 38 and also IFRS 3 with regard co iden- tifiability criteria, an intangible asset is identifiable as soon as it meets the con- tractual-legal criterion even if the asset is not transferable or separable from the acquire entity or from other rights and obligations. On the other hand, even if an intangible asset does not meet the contractual-legal criterion, if the asset isc: pable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged individually or together with a related contract, identifiable asset or liability, such an asset is identifiable. IFRS 3 further emphasises that an acquired intangible asset meets the separable criterion if there is evidence of ex- change transactions for assets which are similar to the subject asset regardless of whether such exchange transactions are infrequent and are without the acquirer's160 CHAPTER 8 + Purchase Price Allocation and Intangible Assets ‘The Subject Intangible Asset Meets Identifiabiity Criteria and “Theretore Shall be Recognised at Fai Value Separately. ‘Aro there Terms of Confidentiality or Arrangements that Prohibit the Entity {rom Selling, Leasing or Otherwise Ciitcal Information ‘Associated With the intangible Asset? _ ‘The Subject intangible Asset Does Not Meet Identitiability Criteria and Therelore Shall not be Recognised. FIGURE 8.2 Process of Assessing the identifiability of an Intangible Asset involvement. One important thing to note is that if there are terms of confidential- ity or other agreements that prohibit an entity from selling, leasing or otherwise exchanging critical information associated with the intangible asset, stich an asset would not meet the separable criterion. The process of assessing the identifiability of an intangible asset can be summarised in Figure 8.2. The identification of intangible assets must be a thorough and diligent pro- cess. Such a process requires valuers to make every effort in reviewing extensive documents about intangible assets and the transactions which are sometimes very technical and complicated. Valuers also have to spend a fair amount of time on brainstorming and be interactive with the management of the acquirer and acquiree in the discussion and assessment of the identification of intangible assets. Practically, itis critical for a valuer to review at least the following documents (if available) in order to appropriately identify intangible assets: * Board papers/minutes/presentation slides to identify the rationale for the acquisi- tion, especially in relation to porential intangible assets as part of the transaction: © Public announcements or press releases by the acquiree and the acquirer; + Financial, tax and legal due diligence reports; snnual reports of the acquiree; © Acquiree company’s website; + Annual reports of comparable companies, especial assets recognised in past acquisition transactions; * Analyst and industry reports; and © Sales and purchase agreements and other relevant documents of the acquisi- tion transaction. y information on intangible A valuer should interview the management of the acquirer to understand the ra= tionale and motive behind the acquisition transaction, It is important to find out8.2 How Do We Identify Intangible Assets? 169 from the acquirer what additional assets they have bought apart from the fixed assets and working capital and if such assets provide significant economic advan tages. In addition, a valuer should also meet with the management of the acquire company to understand the acquiree's business operation and discuss the poten tial list of intangible assets that have been initially identified based on the relevant and available documents. \s a starting point, a valuer ean use the list of examples of identifiable intangible assets that might be acquired in a business combination as shown in IFRS 3. Intangible assets are categorised in various groups including the followin + Marketing-related intangible assets (c.g., trademarks, trade names, internet domain names, non-competition agreements); + Customer-related intangible assets (¢.g., customer lists, order or production backlog, customer contracts, customer relationships); © Artistic-related intangible assets (e.g., books, magazines, music works. pictures and photographs); * Contract-based intangible assets (¢.g,, licensing agreements, advertising agree- ‘ments, management contracts, service agreements, supply contracts, use rights for drilling); and * Technology-based intangible assers (c.g, trade secrets, databases). . patented or unpatented technology, The nature and feature of each acquired intangible asset including rights, restric- tions, obligations and economic benefits attached to the asset must be considered in determining whether the identifiability criteria are met. There are various types of intangible assets identified in a business combination and such assets may be different depending on the market or jurisdiction, For example, Table 8.3 presents some of the intangible assets that have been commonly identified and valued by companies in Singapore, TABLE 8.3 Common Intangible Assets Identified and Valued By Companies in Singapore No | Inranciete assers Tree Basis "1 Customer relationships Customer-related Contractual and ] Non-contractual 2 | Order or production backlog Customer-related Contractual 3 | Brand, trademark, tradename | Marketing-related | Contractual 4 | Licensing agreement, royalty Contract-based Contractual agreement 5 Favourable supply agreement =~) -Contract- based Contractual 6 | Non-competition agreement Contract-based Contractual 7 Franchise agreement : Contract-based Contractual | 8 | Technology, patent Technology-based Contractual162 CHAPTERS = Purchase Price Allocation and Intangible Assets 8.3 How Do We Value Intangible Assets? As discussed and detailed in Chapter 1, a valuer can follow the same valuation process in performing the valuation of intangible assets as shown in Figure 8.3. In carrying our the valuation of intangible assets, a valucr should rely on the fair value measurement framework as detailed in IFRS 13. Useful Life of Intangible Assets One of the important analyses under Step 2 and Step 3 (as shown in Figure 8.3) is the assessment of the useful life of intangible assets which is also the key input to the valuation. The useful life of an intangible asset will be used as a reference in determining the period over which the intangible asset ean generate economic ben: efits, and then the expected cash flows over such a period will be used for the valu- ation of the intangible asset under the income approach. According to IAS 38, ‘An entity shall assess whether the useful life of an intangible asset is finite or indefinite and, if finite, the length of, or number of production or similar units constituting, that useful life. An intangible asset shall be regarded by the entity as having an in- definite useful life when, based on an analysis of all of the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity’, The standard also identifies the following factors that one should consider in assessing the useful life of an intangible asset: a) ‘The expected usage of the asset by the entity and whether the asset could be managed efficiently by another management team; (b) Typical product life cycles for the asset and public information on the estimates of useful lives of similar assets that are used in a similar ways Technical, technological, commercial or other types of obsolescence; ‘Step 1: Define the Engagement and Scope of Work ‘Step 2: Understand the Nature and Characteristics of Intangible Assets Including Rights, Conditions and Especially How the Intangible Assets Contribute to the Value of the Business os wei i aa ‘Step 3: Determine information Requirements, Availability and Quality. [Step 4: Select the Valvation Approach and Meth aa det ieee ‘Step 5: Determine the Relevant Valuation Parameters and Results ‘Step 6: Cary out Sensitivity Analysis and Valuation Crosschecks FIGURE 8.3 Valuation Process to Value Intangible Assets8.3 How Do We Value Intangible Assets? 963 (d) ‘The stability of the industry in which the asset operates and cha market demand for the products or services output from the asset: (c) Expected actions by competitors or potential competitors: (f) The level of maintenance expenditure required to obtain the expe future economic benefits from the asset and the entity’s ability and inten tion to reach such a levels (g) The period of control over the asset and legal or similar limits on the use of the asset, such as the expiry dates of related leases; and (h) Whether the useful life of the asset is dependent on the useful life of other assets of the entity. Iris important to know that the above factors, used to determine the useful life of an intangible asset, are considered for the accounting purpose. This means that these factors are used to determine the useful life of an intangible asset for the es- timation of amortisation expenses. However, a valuer still cam consider these fac tors in assessing the useful life of an intangible asset for the purpose of valuation on the condition that such factors should be considered by market participants in pricing the subject asset. An intangible asset has an indefinite useful life on when ‘there is no foreseeable limit to the period of time over which the asset is expected to generate net cash inflows for the entity’. An intangible asset arising from contractual of legal rights is normally restricted by those rights and therefore will have a useful life that cannot exceed the period of such contractual or legal rights. If the contractual or legal rights can be renewed, the useful life can include the additional renewal periods) if from the market participants” perspective there is evidence to support that such renewal possibly happens and the cost for renewal is insignificant as compared to the benefits that can be derived from the renewal, In summary, useful life is a key assumption for the purpose of valuing intan- gible assets and hence the valuer has to be very careful in performing the analyses of useful life. Such analyses can be carried out at an early stage during th tification process of intangible assets. Important factors considered in useful life analyses include obsolescence and economic, contractual and legal right factors. Valuation Approach Used to Value Intangible Assets ‘The real calculation of the fair value of intangible assets will be undertaken from Steps 4 to 6 as shown in Figure 8.3, The IAS 38 sets out the identifiability criteria which are used to determine whether an intangible asset is recognised separately from goodwill. However, the identifiability criteria do not provide guidelines for measuring the fair valuc of an intangible asset. Instead, the measurement concepts and principles that are introduced in IFRS 13 will be used as a key reference in performing the valuation of intangible assets. A valuer also takes into account other valuation market practice guidelines (e.g. the American Institute of Certi- fied Public Accountants’ Accounting and Valuation Guide: Assets Acquired to Be Used in Research and Development Activities ot The Appraisal Foundation’s Best Practices for Valuations in Financial Reporting: Intangible Asset Working Group ~ Contributory Assets), especially when such guidelines are used by market participants in pricing the intangible assets.164 CHAPTER 8 * Purchase Price Allocation and Intangible Assets In general, intangible assets may be valued based on the market approach, cost approach or income approach. Similar to the rationale adopted for business valu- ation, the selection of the appropriate valuation approach will very much depend on the nature and features of the subject asset (based on analyses carried out under Step 2 shown in Figure 8.3), the availability and the quality of information (based on the analyses carried out under Step 3 shown in Figure 8.3) The market approach measures value based on the price at which other market participant buyers in the marker have paid for assets which can be con- idered reasonably comparable to the subject asset. When adopting the market approach, a valuer collects data on the transaction prices of reasonably compa- rable assets. Adjustments are made to the comparable assets to compensate for differences between those assets and the subject asset. In the Singapore context, duc to the uniqueness of each intangible asset and the difficulty in finding com= parable assets that are closely identical to the subject asset, the marke approach is rarely adopted for valuing intangible assets for financial reporting purposes. However, market data such as benchmarking comparable profit margins, market royalty rates and licensing rates are still key inputs to the income approach. The cost approach is based on the premise that a market participant investor! buyer would pay no more for an asset than its replacement cost or reproduction cost, The replacement cost is normally defined as the cost of replacing a subject intangible asset with one of similar functionality and utility, whereas reproduc- tion cost is normally viewed as the cost of creating an asset that is exactly the same as the subject intangible asset. In other words, the selling price thata market participant seller expects to receive from selling the intangible asset will be based on the cost to build or to replace the subject asset that a market participant buyer is willing to pay. The disadvantage of this approach is that it does nor caprure the future returns attributable to the subject asset and therefore may be appropriate for valuation of intangible assets that do not dircetly generate cash flows such as software for internal use or licenees. In practice, the cost approach can be used in certain cases to cross-check the valuation results derived from using the income approach. In practice, the cost approach is commonly used for valuing the assem- bled workforce. IFRS 3 defines assembled workforce as ‘an existing collection of employees that permits the acquirer to continue to operate an acquired business from the acquisition date’. IFRS 3 does not require the assembled workforce to be recognised separately from goodwill but its value may be subsumed under the goodwill. However, in practice, assembled workforce is also valued for the pur- pose of calculating the contributory asset charge in determining the fair value of some intangible assets under the multi-period excess earnings method (MEEM), which will be introduced after Example 8.2. Example 8.2 Assembled workforce Table 8.4 presents an example of the valuation of assembled workforce using the cost approach. The value of assembled workforce can be estimated by the sum of avoided training and recruiting costs that would be incurred to replace the existing workforce of the acquiree company. As shown in Table 8.4, there are ten senior executives in the top management of the acquiree with annual total staff cost of $2,175,000 (ar equivalent to $181,000 per month), Assuming it takes two months for the acquirer to train the newly165 ‘8.3 How Do We Value intangible Assets? “sjjo:punoi 0} anp dn ppe rou sew jexo1 vice] LOE ov z Laz € ce ovo’ oz Is sales, oos's oss 4 000’ s oor’ o08’91 9s ers uoNINPOld ta oe 1 Lp e iy 09s. oe HeIs anneasuUpy ost 0s z oz z ool o02't sz quawa6euew a[ppIW zev oe L zoe z LgL sue on quswabeuew doy ‘Swormon | isoosowvas | swe | wouveous | (Suinon) | wouvaramnoo | wourseana> (0008) oneness “yao” waessoa oun ouse)”tnuocone’” | “nan s mse Towag Novices wouvacus sme ares | ito ey mo | jean | eas | were | smunoy, | sSrmery {|__| —— _ yreouddy ys0> ayy Buisn ar10pyiom pa|quiessy youoneNeA He FT8VL166 CHAPTER 8 * Purchase Price Allacation and Intangible Assets Seen en nn en EEE TABLE 8.5 Common Valuation Methodologies under the Income Approach for Intangible Assets ‘Common Watuation MerHopoLocy Order or production backlog MEEM Brand, trademark, tradename Licensing agreement, royalty agreement —_—Relief from royalty/MEEM Favourable supply agreement Non-competition agreement Franchise agreement Relief from royalty/MEEM ‘Customer relationships MEEM Technology, patent Relief from royalty/MEEM Relief from royalty/MEEM Incremental cash flows With and without recruited senior executives to have the skill sets to reach the level that can replace the existing executives of the acquire as at the acquisition date, the cost for such an exercise will be calculated based on the monthly cost of $181,000 multiplied by two months to arrive at $362,000, The recruitmentisearch cost per executiv is $7,000 and therefore the total recruitment/scarch cost is $70,000 for ten ex- ecutives. The estimated value of the assembled workforce in relation to top man- agement will be the sum of the training cost ($362,000) and the recruiting cost ($70,000) which approximates $432,000. We perform the same calculation for every other staff category and sum up all the training and recruiting costs to arrive at the value of the assembled workforce — $8,714,000. The income approach focuses on the income-producing capability of the sub- ject asset. This approach is based on the premise that the value of an asset can be measured by the present value of the future cash flows expected to be derived from the subject asset over its remaining useful life. In practice, the income approach is most commonly used in valuing intangible assets for financial reporting purposes as it reflects the future economic benefits expected from market part owning the subject asset. Some of the common methodologies under the income approach for each type of intangible asset are summarised in Table 8.5. 8.4 Multi-Period Excess Earnings Method (MEEM) Under MEEM, the value of an intangible asset can be measured by the present value of the net cash flaws generated by the intangible asset in combination with other tangible and/or intangible assets (also known as the contributory assets). In summary, MEEM can be applied in a few steps as follows:8.4 Multi-Period Excess Earnings Method (MEEM) 167 * First, the after-tax cash flows generated by the intangible asset are determined, and then the hypothetical cash outflows for the contributory assets (the con- tributory asset charges or CACs) are deducteds * ‘The remaining after-tax cash flows are then discounted to the measurement date using an appropriate discount rate specific to the subject intangible asset (present value of net cash flows); and * Tay amortisation benefits (if any) are then added to the present value of net cash flows to arrive at the fair value of the subject intangible asset. After-Tax Cash Flows Depending on the methods for calculating the CAC for fixed assets (which will be discussed in the next section), the determination of after-tax cash flows (before CACs) can be slightly different. If che ‘return of the fixed assets is already taken into account by depreciation expense included in the forecasted earnings before interest and taxes (EBIT), then the after-tax eash flows can simply be determined as shown below. eBIT ~ Tax (based on EBIT) = After-tax cash flows before CAC If the ‘return of* the fixed assets is segregated from EBIT and is calculated in com- bination with ‘return on’ of the fixed assets, then the after-tax cash flows can be determined after adjusting the depreciation expense as follows: EBIT ~ Tax (based on EBITDA) + Depreciation expense After-tax cash flows before CACs Ic is important to take nore that the forecast cash flows must reflect market participants’ view in pricing the subject assets and hence should exclude the entity’s specific synergies unless such synergies can be enjoyed by market par- ticipants. One of the techniques used to assess the reasonableness of forecast cash flows is the business enterprise value test which will be introduced later in Section 8.8. Contributory Assets and CAC The subject intangible asset does not generate cash flows itself but rather it uses and combines with other contributory assets to generate cash flows. The identification of the contributory assets and estimation of CAC are important steps to be under- taken in the application of MEEM,168 z CHAPTER © Purchase Price Allocation and Intangible Assets TABLE 8.6 Common Contributory Assets Cash, debtor er accounts receivable; inventory; credi- tor or accounts payable; Accruals; other current assets and current liabilities Working ca Fixed assets (tangible) Land; building; plant and equipmen' fixtures jurniture and Intangible assets Assembled workforce; customer relationships; brand; trademarks; trade names; patents; technology Contributory assets aré used in combination with the subject intangible asset for the purpose of generating future cash flows associated with that intangible asset, It is important to note that the identification of contributory assets should reflect the market participants’ view regardless of whether these assets have been owned or not owned by the acquiree entity as at the valuation date, Some of the common contributory assets are summarised in Table 8.6. CAC represents the ‘return on’ and ‘return of", which is calculated based on the fair value of contributory assets multiplied by an appropriate rate of return. «© The ‘return on® concept is similar to the rental payment to the hypothetical owner for using the rented asset. © ‘Return of refers to the cost accumulated to replace the assets, For example, a return ofa fixed asset has been included in the forecasted depreciation ex- pense. For self-developed assets such as assembled workforce or customer ists, the annual cost to replace such an asset is included in the forecasted expendicure. The American Institute of Certified Public Accountants (AICPA) Accounting and Valuation Guide" provides some guidelines and examples of contributory assets and their respective basis of charge as shown in Table 8.7. Despite the fact that these guidelines are developed for fair value measurement under the US Gener- ally Accepted Accounting Principles (US GAAP), itis widely accepted and com- monly used asa reference point for financial reporting valuation under the IFRS environment. Example 8.3 Contributory asset charges The following example presents a simplified calculation of the CAC for each con- tributory asset including fixed assets, working capital and assembled workforce. ‘As shown in Table 8.8, the CAC of fixed assets for 2017 is calculated by multiply- ing the ‘return on” of 6% (¢.g., long-term borrowing rate or financing rate used. {ICP IP R&D Task Force and AICPA staff, 2013, AICPA Accounting and Valuation Guide: Assets Acquired to Be 4m Research and Development Activities, New York, American Institute of Certified Pub ¢ Accountants, IneAsser Working capital Fixed assets (for example, property, plant and equipment) Workforce (which is not recognised separate froin goodwill, customer lists, trademarks and trade names Patents, including other types of ‘enabling technology Other intangibles, including base (or core) technology cost of equity for market parti by market participants, 8.4 Multi-Period Excess Earnings Method (MEEM) a SS SS ESS TABLE 8.7 Basis of Charge for Common Contributory Assets ‘Commonty Consioeneo Basis oF CHARGE Blend of short-term borrowing rates (for example, ‘working capital lines or short-term revolver rates) and, Blend of a borrowing rate for similar assets for market participants (for example, terms offered by vendor financing, rates on longer-term borrowings, or rates plied by operating leases, capital leases or both (typically segregated between return of li, recapture of investment] and return on asset)) and cost of equity Frequently, the weighted average cost of capital (WACC) (may be lower than the discount rate applicable to a particular project) Frequently, WAGC may be lower than the discount rate applicable to a particular project. In cases where the risk of realising the economic value of the patent is close to, or the same as, the risk of realising a project, the rates would be equivalent to those of the project. Additionally, when a contributory asset is itself valued using a relief from royalty method (which is commonly the case with patents and enabling technology), the royalty rate assumed is, in essence, a substitute for a contributory asset charge (economic rent forthe use of the asset). In other words, the royalty ratecan be assumed to incorporate the return on and of that asset. Thus, the contributory asset charge for the use of that asset would be set equal to its rayalty rate multiplied by the relevant revenue amount (adjusted for taxes if contributory charges are taken against the after-tax cash flows). Rates appropriate to the risk of the subject intangible asset. Market evidence would 5e used whenever available. In other cases, rates would need to be consistent with the relative risk of other assets in the rates being higher for riskier assets, tionally, intangible assets are typically not financed with significant debt and, therefore, would require a higher proportion of equity financing, net of tax) by the value of fixed assets of $12 million 1 169 arrive at $0.72 million. This charge of $0.72 million is then divided by the 2017 total revenue of $30 million to arrive at the CAC rate of 2.4%. The normalised CAC of 1.8% for fixed assets is calculated based on the average of the CAC fron 2017 t© 2021. This CAC of 1.8% represents the ‘return on’ of fixed assers, h130 CHAPTERS * Purchase Price Allocation and Intangible Assets TABLE 8.8 Calculation of CAC (S muuion) 2017 2018 = 2019» 2020-2021 Total revenue 300 400 500 550 600 ‘Working capital 18 24 30 33 36 Fixed assets 12.0 14.0 15.0 14.0 14.0 Assembled workforce 1.0 1.0 1.0 1.0 1.0 Fixed assets ‘Charge (after-tax rate) 6.0% | 0.72 0.84 0.90 0.84 0.84 ‘Charge as a percentage of total revenue Normalised level 24% 1.8% 1.5% 14% Working capital Charge (after-tax rate) 4.0% 0.07 0.10 0.12 0.13 0.14 ‘Charge as a percentage of total revenue Normalised level 0.2%] 02% 02% 02% 02% 02% Assembled workforce ‘Charge (after-tax rate) 12.0% 0.12 0.12 0.12 0.12 0.12 Charge as a percentage of total revenue Normalised level 0.3%] 0.4% 03% 02% 02% 0.2% Aggregate contributory asset [23%] charge Total may not add up due to round-offs is similar to the rental payment for using the fixed assets. The ‘return of for fixed assets will be taken into account by including the depreciation expense of fixed as- sets and capital expenditure in the forecast cash flows. Some valuers would prefes to combine the ‘return on’ charge and “return of” depreciation expense (after ex- cluding the tax shield) to-arrive at one CACas return on and of (as percent of rev- enue) for fixed assets. However, when using one combined ‘return on’ and ‘return, of fixed assets, valuers should exclude depreciation expense from forecast cash flows to avoid ‘double counting” in the valuation of intangible assets. In practi valuers also consider another method whereby the calculation of CAC is similar to the determination of loan payment which is based on the rate of “return on’ fixed assets and the annual balances as well as the weighted remaining useful life of each fixed assets group (including new capital expenditures) and a weighted remaining useful life of each respective balance. Similarly, the CAC of the working capital for 2017 is caleulated by multiplying the ‘return on’ of 4% (e.g., short-term borrowing rate used by market participants, net of tax) by the value of the working capital of $1.8 million to arrive at $0.07 million.8.4 Multi-Period Excess Earnings Method (MEEM) 474 This charge of $0.07 million is then divided by the 2017 total revenue of $30 million to arrive at the CAC rate of 0.2%, The normalised CAC of 0.2% for the working capiral is calculated hased on the average of the CAC from 2017 to 202. There is no ‘return of” for the working capital as the working capital wll be replenished over time, ‘We can use the same approach and calculation method to determine the CAC of the assembled workforce. The CAC of 0.3% as shown in Table 8.8 represents the ‘return on’ for the assembled workforce. There is no ‘return of for the assem- bled workforce as the annual cost to replace such an asset is included in the fore- casted expenditure. Discount Rate The discount rate for the valuation of intangible assets is estimated based on the assessment of risks relating to the cash flows expected to be derived from the sub- ject intangible asset and also the required rate of returns expected by the owners (market participants) of the subject intangible asset. In general, the discount rates used to value intangible assets are higher than the WACC* of the acquiree com- pany as the riskiness of individual intangible assets is higher than that of the com- pany ay a whole (this is similar to a case where the riskiness of an individual asset is higher than that of its portfolio of individual assets). Hence in selecting the dis- count rate of an intangible asset, a valuer normally makes reference to the WACC of the acquire company. Itis also important to note that WACC should reflect the market participants’ views and hence the inputs to the calculation of WACC will be primarily based on market data Example 8.4 Discount rate The WACC of an acquiree company is estimated at 11%. In determining the discount rate for valuing the intangible assets of the acquiree company, for example, cus ‘tomer relationships, a valuer may add a premium, say 3%, to the WACC of 11% to arrive at a discount rate of 14%. Tax Amortisation Benefit (TAB) TAB is an upward adjustment to reflect the value of the tax relief benefited by the amortisation of intangible assets. TAB is hypothetically computed by discounting the tax savings arising from the amortisation of an intangible asset for income tax purposes to the present value as at the valuation date. Let EV = fair value of the subject assers PY = present value of after-tax cash flows from the subject assets N = the amortisation period under applicable tax jarisdiction (years); R = discount rate (%); and T = tax rate (%). 5. The approach for the determination of WAC is discussed in Chapter 4172 CHAPTER B © Purchase Price Allocation and Intangible Assets Annually, the intangible asser’s hypothetical amortisation charge will be FV 1/N over the tax useful life of N years. With the applicable tax rate of T, the company can claim an annual hypothetical tax benefit of FV x 1/N X T. These annual tax benefits are then discounted (mid-period discounting convention to be adopted) to the present value as at the date of valuation as follows: TAB = FV < VINX TX 11 + RY + FV IN TVET ERY a HE XUN XT U1 + RH 89) TAB = FV x UNX TC {1/1 + RYPS 4 11 + RYE. + CT + RY 88 IN TX C1MT + RES ELE YS + + V(t + RY 25} The equation can be written in a few ways.as follows: Let K (step-up multiple) | TAB = FY XK TAB = (PY + TAB) x K TAB = Kx PV+ KX TAB TAB — K x TAB = K x PV (1K) x TAB = K x PV Finally we can compute the TAB based on Equation (8.1) below: TAB = PV x Ki(1 ~ K) with K = WN x T {11 + RPS + V1 + RPE a + VT + RYO (8.1) Example 8.5 Tax amortisation benefit and valuation of customer relationships This example presents a simplified TAB calculation for customer relationships. The tax useful life of the customer relationships is assumed at five years (equivalent to an amorti- sation rate of 20% per annum) and the income tax rate is assumed at 17%, The discount rate is 14% (mid-period discounting convention to be adopted). The present value of after-tax cash flows before adjusting for TAB is calculated at $1,769 thousand (PV). As shown in Table 8.9, the step-up multiple (K) is calculated at 0.125. By using Equation 8.1, the TAB is computed at $253 thousand, which is then added to the present value of after-tax cash flows ($1,769 thousand) to derive the fair value of customer relationships of $2 million as shown in Table 8.10. ‘TAB is not required if the amortisation of the subject intangible asset is not allowed for tax deduction, In general, the application of TAB depends on the tax jurisdiction where the subject intangible asset is acquired. For example, in the Singapore context, only certain intellectual property rights covered under Section 19B of the Income Tax Ace such as patents, copyrights and trademarks are quali fied for writing-down allowances, and the writing-down period ean be five, ten or fifteen years, Therefore, for the purpose of determining TAB, a valuer has to identify the appropriate tax jurisdiction and then check carefully if any market participant can claim a writing-down allowance on the subject intangible asset as well as the writing-down period or the amortisation period or the tax useful life of such an asset (if applicable) in that tax jurisdiction,29u1p F AAPY SPSOW avys sojqiBuvuL ayp 40g A[peIoadsa ‘sasodind Sunzodaa Jee oF siasse aqiBueruy anyea or pasa Kjuouu0> st PYAR ‘[e49U98 uy ssdnysuonejas aaisnjoxa-uou Jo aarsnox9 a8 tim sdiysuonepaa 5.Aueduto> aazmbor ayp jo 2anaeu au sHaeyAL « gsdiysuonepps soworsno Sunsixo urea yNBoe af 40g PALMIU! 94 JEW ASO PUL aU YIM OFT « gstopraord agrar9s x0 saoyjddns ajquavdiuo> JDIp10 20} YOTWSS OF S4dLUOISND 404 PaLsNdU! dq fLA6 3809 PUL DUN YON NOP, « gS1aplnoud agiauas 40 sapyddns au 404 Yo] puke aya Jo 9p1f [NY -38f STONED aUp ssassE Pu SdiysMOnLp—s saMKOISND Jo SSSULYINS, ayy UO SISALUR ySnosoyp vino Gaaes 04 sey s9nyes v SuoUIppE UP GasNpuL 4p UI suONoESULA Ied 410 satuedwios ajqeseduuoo jo woned [eaeorsty ayy o7 aauadajad axeW ULD s9n]EA vb ‘oiqujreae you sc ayes wunyp aya wo AuedueoD aazmMboe ayy Jo vIEp [eOuOISIY JT ‘szattlolsns Jo o1jogiiod s HuNsIXa Woy, S9]eS 10 saxsoUISNG Surso] pue ursmpaa jo azes oy st yTM ages WORE 40 ares Wany> oya st sdiys -DONE]DI JawioIshd jo uOLeN/eA a42 UE SUOLduINsse parseoas0y AX Oy FO IU) ayey UOR Ty 10 WunyD sjo-punos 0} anp dn ppe you few je10L (ez (000s) {0 Dy x Aa av sevo (9) aidiainw dn-dars 6100 sss0 ub 0 sy Woz S 1200 ze90 %e8 or se ooze zoo eo met oe st 6lozsiE 800 ceo eb %Oe sb gloz et zevo 60 Lb yor so gunz Dxaxv > a v SULSN3@ XvL 40 woises amv &) awe wi) amos v3A (NN) BMWA ANAS NaS nu, ——NOUYSIIONY OL SUY3A ‘cons wang 300N G9c't (0008) (Ad) anyea quasaud seb ates yuno>s1q sdiysuonejos xowoysny Sdiysuoize/ay 49W0}SND 404 AY JOUOHLINIeD 6°8 FTaVL ELL (Waa) PONT! sBulWeg 550>xg poved-nINW vs——————— Purchase Price Allocation and Intangible Assets CHAPTER 8 174 syjo-punos 01 anp dn ppe rou few jeroy ooo’ zzz ese. anjen pepuawmoray sayauag uonesnsowe xey SMoyp Yse? KeLUEYyE jo Sonjen juaseid jero, fe tb 6s 08 iLL SL SL OZOH Smo}p Yse> xeR ~s@Yye Jo anjen uasaid S870 ZED PLEO 2D RYO SSS EO LzL0 Ss zewO LED HPL ayes qunorsiq s6 se st so ss sv st st st so 40x98) aw tll PEL GL BL AZZ OEE CIS Dv>984e SMOl} USED XEON (vel) (E02) (rz) (582) (hE) Lov) (e) (SS) (259) (882) S'S) abrey> | yasse Auoyngysiuo> sez LEE Ede eS 899 SLL SG BOL LOE'L Dv) a10)34 SMOL} YSED KEI (6s) (69) (18) (c6) (eit) GEL) BSL) (zt) (222) (892) Met asuadxe xe} aOsU} Lyf 90 Bb SNR ZOL'L SOL SuS'L (ze) (ze) (vv) (zs) (ee) (sa) (001) (LL) (EL) ML) (se) (LL) (EL SL) (BL) IZ) SZ) (LE) (9S) (OED) HE asuadea uonesado ble SS SO BLL bE BOL wLeLS OSL GUL BHL'Z_ MSL youd $5045) EOl'e S69'E LSE'y B'S S679 SBZ'L« SHB BLO'OLGSR'LL2ZE'bL LOL WEL WEIL —WO'LZ IZ —HHLE Oly HIS KOPI %wOOB ayes uiny Scb'ez E2512 696'SZEL'be © UAO'PZ—«EET'ZZ_—ObL'OZ_- 9956 GzS'BL_EOB'LL sioworsno | seinBas wo anuansy | szoz soz) peoz TOT ceo bwOZ =zOT SS GkOT BLOT ALO (oo0s) Waa Bursn sdiysuoneay seusojsn> Jo uoHenjen OL's ITaVL(Aue y1) aasse 2]qiSueauy agatqns aya yin PRELDOSSE sosuadxd [CUONIppe sareUIHSD Ose JaNpeA ays pue “{sBuLses GPeXos [PuoRoU Jo) smuamided Cayesod poUOIIOU ayp Ie aatzTe OF 19¥sE a]qUSUEIUT 139(qns 942 IM porerosse sapes parseoaroy aya Aq payin uaya st aiva Aa[esou ay, & “aasse a[qisiueiur aalqns aya 304 ajqe aims starqa aves (afeso4 © siDajas JoNpeA ap “Lasse 2]qruPIUL alGns oy Jo sara -r9} 942 Pur siasse apqfuriUE aeyraUHs Jo Sayer {a[ AON 19yJeU Jo SUOREAIASGO Yo paseq ual, “dasse ayqrdiueaur asaiqns ay OF seysLUTs <{qvuoseas a4 LeU S195 “SE apg iSueaus yo saves 4apeXor royswU 10) Yous E suNIOJs0d JONJEA 942 *PUOI9G “esse ajq!SueauT 12alqns axp jo 9st a4 TIM payerosse sayes 10 anuaAsz sandadsoad aep sayrmuapr zanjea e siiye ssmvo]joy se “sdaas may e ut payjdde ag ues poyzaut Agyedor wouy jayjaa aup Kavumuns uy -Gaed pays e xey-19 40 J9U Jo anjen wuasadg “vosse ajqySTueUl 199tqns aya Jo anges srvy ays ae dALUV oa sMoY YsED xersoye 19u Jo sanfes quosaud yo uns ayy ov (SUE J!) FV aya ppe pur aarynsje) ~¢ pur hosse ayqiiuraut ial “nS 242 AIM porelDosse SMO] YsED XeIaDYE IU Jo ANE iussoad dyp aREyAD|E ~~ (GHunaes s589Ka) smoy USED EV IOIO ION — 2) — SW aojaq smoy Yse> xe y - (L183 uo paseq) xey — (1183 Sosse ajqidiuevur malqns aya yam pareioosse (saiiaeys aasse Coanquauo3 aq SunsNpap Jaye) SMO] YseD XeIDYe 19u oy aug. *| “WAN Suraqdde ut sdois UrpuH doNy ue suaqL] ‘sWLDS SmoY Yse> pur sanudady a4 01 diysuonepaa SLb poyrayy Ayjedoy Woy janjay sg176 CHAPTERS * Purchase Price Allocation and Intangible Assets * The after-tax notional royalty payments are then discounted to the valuation dare using an appropriate discount rate specific fo the subject intangible ass © Finally, the tax amortisation benefit (if any) ts then added to the pre of after-tax notional royalty payments to arrive at the value of the subject in- tangible asser. nt value ‘Of the above steps, the search for the royalty rate is the most important process Some databases on royalty rate transactions that valuers can refer to are as follows: + herpswww.royaltysource.co * heps/Avww.royalrystat.com © hetpsi/www.ktmine.com + hep:www.ipresearch.com + hetpsiipscio.com ‘When selecting a royalty rate from the range of market data of comparable trans- ons, the valuers should consider the following, amongst other © The industry in which the intangible assets are used; © Similarity of the subject intangible assets and the assets transacted in compa: rable transactions; © Comparable transactions that are at arm’s length; * Market conditions existing at the time of the comparable transactions; * Any special terms or arrangements embedded in the comparable transactions; a . Market participants’ views or consideration factors in selecting an a royalty rate. propriate Example 8.66 Valuation of the trade name using the relief from royalty method This example presents a simplified valuation of the trade name with the following key assumptions: © The trade name has an indefinite life; * The royalty rate based on market comparable transactions is estimated at 2% per annum; ‘The income tax rate is assumed at 17%; The terminal growth rate is estimated at 1%; The tax useful life of the trade name is ten years; and The discount rate is estimated at 13% (mid-period discounting convention to be adopted). The valuation of the trade name is presented in Table 8.11. First, the annual notional royalty savings are estimated based on a royalty rate of 2% and the annual revenue associated with the trade name. For example, a revenue of $35 million for 2017 will be multiplied by a royalty rate of 2% to arrive at royalty savings of $700 thousand for 2017. Next, we apply an income tax rate of 17% to the annual royalty savings to arrive at the after-tax cash flows. As the useful life of a trade name is indefinite, we then estimate the terminal value® based on the normalised after-tax cash flows of $721 thousand and a terminal growth of 1%. 6. The approach for the determination of terminal value is discussed in Chapter 4Cur Jl) $1809 1eAa|ar pur ise 13a{qns ays Jo apy] Nyasn ‘anuDAaz parersosse souea dapesog ayy wo paseg sBulaes 4a[v4o4 [PUONON xELaYE ay oIeINI|ED “¢ -saasse aq iBuraur svpreuts 4]qeuoseas Jo saved Q[eAOs 19yYIeU JO UONeArasqo puke aasse ayqisuvrut ydalqns aya yo samaeay 9y uo paseg 1asse apgiStreaut aalqns axp soy aves Cajedou areudosdde we aumuiaaq. °Z siosse 9yqueaut yoalqns ay JO asn aya YEN pareisosse sajes 10 anuaaas aarssadsoad 9y1 AHUDPT “] pouzour Aa[esos Woy [p4 94p Sut Xjdde uy sdais uyeur aay ouw ou9qyy, “moy-mouy pue 1 st daas axau auf “puesnoup pZg'eg Jo anpea quasaid aya qe asuize 01 ET JO aed JuNODSIp v IE AN|EA [oUNUAI PUL SMO] YseD XEIIaYE [EMULE [JE IUMODSIP UaYE ayy 'syJ0-puno, 0} anp dn ppe 16u Kew jero, anjen papuauiioray suyaueq uonesiowe xey smo used xeqaye Jo sanjen yuasaid jeyo. SMO, Yse> xeP-sDYE yo anjen quasaig ayes yunoDsiq 40394 BULL anjen pue ates umor6 jeunusay smo}, yseo xeraLyy asuada xe awoouy surnes Ayjekos euonon, ayes Kyekoy otr'er anuanay ozoz suoz Loz poy AyeAoy wor 42/94 0u3 Guisn oweN apedl ayy jo ueRenjeA 11's aTAVL LLL poUsW Ayekoy Woy HY SB178 CHAPTER =» Purchase Price Allocation and Intangible Assets TABLE 8.12 Calculation of TAB for Trade Name Trade name [139% | Discount rate Present value (PV) ($000) 5,874 ANNUAL No. oF Years To AMORTISATION TAX RATE PRESENT PRESENT VALUE rerio (N) Year Minroint (uN) wm VALUE FACTOR OF TAX BENEFITS 1 2017 os 10% 17% 0.941 0.016 2 2018 15 10% 17% 0.832 0.014 3 2019 25 10% 11% 0.737 0.018 4 2020 35 10% 17% 0.652 0.011 5 2021 4S 10% 17% 0.577 0.010 6 2022 55 10% 17% 0511 0.009 7 2023 65 10% 17% 0.452 0.008 8 2024 75 10% 17% 0.400 0.007 9 2025 85 10% 17% 0.354 0.006 10 2026 25 0.313 0.005 0.099 TAB {PV x Ki(1 — K)} (s000) (645) Total may not add up due to round-offs. 4. Calculate the present value of after-tax cash flows associated with the subject intangible asset including terminal value (if any 5. Calculate and add TAB (if any) to the sum of the present values of after-tax cash flows to arrive at the fair value of the subject intangible asset. The challenge in applying the relief from royalty method is the level of detail disclosed in comparable market-based royalty agreements. The determina- tion of an appropriate royalty rate is very much dependent on the compara> bility of the subject asset co market-based royalty agreements, Therefore, the less the information disclosed in the comparable royalty agreements, the less is the likelihood that a valuer can have a good analysis to estimate an appro- priate royalty. 8.6 Incremental Cash Flow Method This method attempts to quantify the incremental benefit in the form of either ‘cost savings’ or ‘incremental revenue’ obtained from using the subject intan- gible asset.‘rasse ajqisiuequt a9alqns aya Jo anyed atey aye DALE OL sMOY, sro Neqaye Jo sanjea iwasosd Jo wins ay? Or (AUE F) F¥L PPE pue renr[ey “¢ 29858 2[qiBueiut 1Dalqns axp or ayidads axes zuMODsIp parsn{pe-ysia aya SUL “st alep UORENTLA ay) 03 ParMoosIp Vay ze SMOY Ysed KeIIDe |ErusWIaIOUT °Z antianar PeUAWALIUL, 10 ,SHUIAKS 1809, s9y319 Jo UFO ayp UN IOSsE I]qNS -ueaut olgns aya Sutume peruourazsuy ap aMIUaaC] POY Moy Yse> [eIUIUAIDUL aya HULA|dde UF sdaas ren 29gyp 238 24041, JAEMUAPLA puK LUAU e ay pynoys quay jenuue Jesnaqodsy aya soreumMse Is1yj FON] e “ET “g aIqe] UL UMOYS SY "EL'8 81921 U! pa|leiap s1 1uawaes6e aseay ajqeinone) ayy jo anjer stey 34 40 vone|n}e2 aun ‘(pardope aq 0} UO!UARUOD BuNUNODSIp po!sad-plLu) %zZ1 Jo axe) JuNoDsIP ay UO paseg '3|q/INpap xe1 105 pamolje you si jusUIDa6e ase] a]qGesNOALy ayajou }OWe BU Se PaLaPISUOD SI GL ON “(Sia aAly “a"!) quaWaaJ6e 9se9] a4, 40 wa} Buyurewa1 ay 4990 winuue Jad 9% M016 03 pay2adxa si pue ayep uolysinbe ‘up 40 Se 100} avenbs Jad ¢°1L¢ AjarewHrosdde Si aya JeLUa! YEW AIUOU 3441 "1605 auenbs sad 7"1§ Jo ares paxiy fjyiuoW e ye a2eds 92440 4o 1984 aenbs 90'S asea| 0 quawae6e asee] Buneiado ue sey Aueduo> aauinb2e ay) ‘step UONISINbSe ous 16 sy awuawea,6e ase9| ajqeunone; e jo ajduexe uo}enjen anryeassnjti ue siuasaud €1'g a|aeL pPoueW Moy YseD jeUaUTA!IUL 343 Bulsn juaWisasBe asea] ajqesnoney jo uonen|en LB aduiexg sass 2qqi@ueaur Daqns aqp jo anpes ay. ae aauue or sMoy Yysed XeI-saIye perutD.9uI yo sonjes auasaud aup jo mins ay ox pappe uayp st (due 41) 1yDUIq ORSOWE XEL 6 pur {(smoy yseo peruauiasouy Jo anyea ua sud) s9sse 9]q Suva i2a/gns ax 01 sy!9ads a1es aUNOssIp paisnlpe-ysta 24 FUE st o2ep MONEN|EA aya 01 paUNODsEp UDYA AE SMOY YsLD XEFaDYE [eUDKUDAIE, sges1u0> {jddns aiqesnosey wos ursise sBurAvs 3805 “8°3) r9sse ayquuesur aoalgns a4 Hume Aq Paresaual smoy Yse> [eUdUZIIIUF aya sayst{qLIsD JONIPA PIS 6 ESMo]]O} PULLS UL se sdais aay ur paydde aq wes poyrous Moy yse> ferUaUIda9uF 943 4 GLb poULaIA Mo}, Yse> jeLUaLHaISUI 9°¢180 © CHAPTER 8 + Purchase Price Allocation and Intangible Assets TABLE 8.13 Valuation of a Favourable Lease Agreement Using the Incremental Cash Flow Meth (s) 2017-2018 = 201920202021 Estimated monthly market rent [S$/sqf] 15) 1.58 1.66 174 1.83 1.92 ~ Estimated market rent growth rate (5%) Estimated annual market rent 94,800 99,600 104,400 109,800 115,200 = Leased area [sqf} 5,000, Less: Annual rental (based on the tenancy agreement) (72,000) (72,000) (72,000) (72,000) (72,000) ~ Monthly contractual rent [SS/saf] (based on the tenancy agreement) (1.2) Cost savings 22,800 27,600 32,400 37,800 43,200 Less: Tax effect of cost savings (17% (3,876) (4,692) (5,508) (6,426) ~—(7,344) Cost savings net of tax 18,924 22,908 26,892 31,374 35,856 Time factor os 15 25 35 45 Discount rate 12% = 0.945 0.844 0.753 0.673 0.601 Present value of the after-tax cash flows 17,881 19,327 20,257 21,101 21,532 Total present values of the after-tax cash flows 100,098, TAB Recommendation of value Total may not add up due to round-ofs. The incremental cash flow method is straightforward but might have el lenges in the identification of relevant market assumption considered by market 8.7 With and Without Method ‘The with and without method is generally similar to the incremental cash flow method. In practice, some valuers may call it the comparative income differential method, income incrementicost decrement method, comparative business valua- tion method or differential value method. Under the with and without method, the valuation of an intangible asset is driven by comparing the present value of cash flows of a business or an entity3802 6un2yseu 94g Ul aseas2U! JUEDYIUBIS e Jo 1INSAI e SE LZOZ UI %G 01 L10Z UL 2602 40 a3e1 BUIUI|Z9p & Je Bse3I5UI sasuadxe Bunesado aya ‘poised paysera104 ‘ewes ay) Suuing “Zaz UJ anuanas ay UO edu! OU sey jUaWae,5e UONNaduIo> -UOU BUp LEYY PALUNSSe S131 “OZOZ UI %S O2 LLOZ Ul %GI Jo ayes BUILIPaP e UO sasea.pep Ajjenuayod anuanas ays ‘arep uoluisInDye ayy Wosy pOliad 1834-2Al} 34} 404 UoNANadwod ,s1a}ja5 942 ISULeBe 7464 03 (3509 UoIRead0 Jo pied) 350 BU! “Jew /EUONYPpe INDU! pue anuanas UI Sasso} Ja4gNs KEW) J9JINBIe BU) ‘SsBUISNG Pauinboe ayi jo siajjas ayy yam quawiaasbe uonyadwo2-VoU e jo a2uasqe ay) U|« Hpaadope 3q 01 Uojuanuos Bununorsip polied-piuu) 9% 71 32 payeW!ysa 5} a1e1 1UNODsIq !922 1 pawinsse 51 a1e1 xe) awosU] 6 ‘Lz0z 01 LLOZ Wous s1ea4 any, Jo Wa DeNLUOD e sey UaWIaEJBe UONNadWo>-UOU a4,» naojaq suondwinsse Ay aus yim UoNIsiNbIe Ue Wo} BuUISUe USL “29.62 Yon nadwio>-uoU jo UONeN/eA palsiiduUts © sjuasoid ajduiexa Bu}ao4]0} ayy poypow ynoyzim pue {aim 24 Bursn quawaasbe uo Nadwos-uoU jo UOHeN|eA g’g ajduiex3 esse ajgifurnur iolqns aup Jo anyes ayp.aw axuue o1 (403984 Kapqeqoud 40 Paisnipe) anjea penuaaayap exp o4 pappe uy si (ue jl) ayauaq HOWesOWE XeL “Sur Jo poliod paunuzoiepoid v 40} sto>}zeus ureysa9 ul ssoutsng v 40 AuvdUOD e quia unadutos toy (ssouisng v yo 49]]98 & 30) Satis ue so jenpLAIput ue sauosoad s{es9u08 aeya (auauoautie aseyaind puv s2jes o1 1UEUIAOD v.30) 19009 [eAay & st jusuid9u8e UonHaduo-uou ay f suauiDase HoRHduOs-UOU E Jo anuasqE ap UL aiadition ov arqiseay pur Ande “Ay qensap ay: sey somuruaso> aya rey Lampqe -qoud oxp areuiuse 02 seq ionjea ayp “wusuaaitie oad wO2-uOU v yo UOLEN|A 9tf 40, ‘9[elwexo 104 “anpea jenusaayip aya 0 pordde st ouEUads INOYEAN aya Jo Pooy!oy! Pue AMigissod aya yo WONEUTASD 24 404 (Aue 48) OIDEY AGeqord y “(anes penuasaggtp,) oueua9s nous sy2.a3pUN SAO yseo xexoye jo anjea auasasd [e201 24 PU OL EUADS Yata ay) JopUN sMOU] YSED Xtr-OYe JO anpes asard [e101 911 UddaI0q JuDL2gAIp OYA Sare|ND|ED.IAN|EA MLL « (ssusng ays asaoad 07 sasuadxa Suuanou! [eUOMIppe Or anp 3805 Ut Ssez5uN ue a0 ‘Siot01snd Jo sso] 02 aNP anUAAgs UW] svauDOp E “Ha) Jasse UL Yans ZUTUMO 300 WOIg Susu IseduE syne OU dYp 190]J0r {|pe19U98 OLEUDIs InoLEAA 243 J0p “UN SMO] YSLI OL “( OLIEUIG IMOTPLAY,,) ISL a[quTuPIUL i9alqns sy.01 SEDs area qunossip parsn pests aues ay Zuisn aiep WORREN|ta ayy 03 SOY YseD YoNs s1unedsIp PUP 3]1] SHUOUOD9 521 J9K0 iasse aq} BuEAU IDMLGNs 243 MOYLAN ang Auuua aures ays Aq paresauad smog yse xvr-r9yv soyst|qeass Jonfes ay Spurs 6 “(,014bUaIg ULAL,,) JassE 2]qiTUEIUE IDaIqIns ay! o1 sytsads aze1 1unoosip parsn{pe-ysta ayp SuIsM arep UONEN|RA ay) 02 SNOT] sto Yans SIUNODSIP pue a}1] 1UOVOD. sat 19A0 Loss" 9]qIBUEEIUT adaiqns aya Sut -umo Gnud ue porpaw now pur Yai aya KuewRUAS Uy Asse a|gISUEIUT UE Yons SUIUAO OF syUEYR ssouisng posMbse aya Jo swolf yse> Jo sso] a]qeproaL, 942 YaIa PoreIsONse 51 2DS8E aiqisueaur axp jo anjeA ayn ‘spsom s9y20 Ul “Asse a[qeFUEIUE ADA{qNs 943 AnoMIN tog Gnue so ssoursng aures oy Jo sey YatAs iasse ajquIuEUL Dalqns ay Suey BSE POURAI INoMRIAA pue YIM 8‘sy}o-punoa o anp dn ppe you Kew yexoL ‘ov ‘anyea yo uonepuamiworay Ese = au Ese sz 401384 Bunediua> Aariqeqoud 0’ anjea jenuaiayiq 989° $$ ao ar quawaai6e uonnaduior-uou e inoWLINA i ses RS quawaa,6e uonnaduor-UoU e MRIAN 8S OvEL_ «LOL (962) S08 ses'tcL'| OBL Smojg Use> weyuaiye 4o anyen 2Uas21¢ £190 SL0 BO SHH L090 €s20 0 wrBO SHO MI) ayes wno2sig se st st so s¥ st st 0 soppey aw za 6te's_ Bat (Ete) 9087 zzz s01'% 06 smo YseD KETIaHY (oor) ~ - (00s) ~ 7 ot (o0s't) xodep oe) (sez) (ee) a) (e98) eyde> Bupjiom uy aBuey> rary (sis) (ev) (eve) (629) zs) (90s) asuack@ wer 21024) eee ECT ue asst vauea (sis) (oer) zs) (0s) (Z| asuadk xe a02u) Wwez 956" zae'e _z0e't ie (sie) (962) (082) "s9z)_(@s2) asuadxe uoneraideg (EEL) (WOE) (9e't) (sez't) (oxz') (@so't) (€z0'v) asuade voneiedo ws wor HSL sor asuadra vo uawiaaiBe uonnadure>-uoU 40 1>edhu) ivv'vaye'e ees’ Eve's leh'y rly ELSE SOL'E LBC ayoud $8015 zac'ie eri'ez ust'sz GEL'IZ OLE 6zB'6Z—zSS'LZ —oub'9z_SuS'Sz anuaney %O S$ OL~ ssi - anuanas ua juauaaibe uonnaduro>.uou Jo Dred) zoz 0zoz_—««GLOZ_—«BLOZ_—«LLOZ_—«LZOT_—«NOT_-«sGLOK_— «BLO LLO (000s) aNawaswoW on ANWEIRUOY NOUL32WO-NON AMOMLIM SOS HSVD 45¥D3H04 AIAN Senna HSWD S¥OIHOS —— POYeW INOYHM PUe UDI 243 BuIsn yUoWaaIby UORIZedWOD-UON 243 JO HOReN|En YL’ FTaVL i ore et ne EO aSIQEU? ||}M ISa2 Ag Jo VONL|NI]e> Ag dy ‘sIUEdIsHIed 1x2eW Aq pos9prsu0D DOVa\ swetadosdde uv we sanyqeyy pur siasse Sunesado su woay poatiap sMopy yse> ayy oamany s,huvdatoa sazmboe ayy Sununo>sip Koy 94] -PURIsI9pUN or seo pu prEAUOpYsIES St powpaur mow pue YALA dy *poyIsUE MOL) YsPS [PIUIUIDISUT a4) 01 2 “iasse a[qiTueiuE Malgns aya jo anyea aya qe Aue 61 (10198 Aarpqeqod e 403 parsn{pe) anjea jermuasayjip aep 09 (Aue Jt) AVL PPY “s vanpes [erauo9ygip 943 03 (Aue 41) 40398 Humadwuos ayqeqoad v diddy “} “oUPuD9s NOY axp JapUn aNpeA ruasaad [Pod ay Pur OULLOSS yore aya aapun anyea qwasaid je1o1 axp uaaxuag anyea jenuazayyIp ay aLE|NA[E>) “oMeuads anoYysim arp Japun ua dures ay Sq parexouad smoy yses xvIsayye oy} yo anjes iuasoad aya ysuqeisy “¢ “oeUa.S pI a4) a9pun Aanue ue dq paresaua’ smog yseo xexaoye ayp jo anjea quasaad aya YstqeIsT *) “porpsU ANOYBLAN pue yp aya Burdpdde uy sdavs WIPW OAY aue day]. “siasse pareja1-RunayseW pue suwOIsN> “$ On BYR Udaanjaq anjen jenuarapsp ays ‘A|BuIpso>y ‘puesnoys ggy'y$ ae Paze|naje2 5! oLeuars juauiaas6e UoNNadWod-VOU JnoYLIAA, @ 9PUN 1207 Od L102 Wuo4} PoUad awes ay2 40} smoly Yse> xeI-29Ye Jo Onjen ywosasd ay) WUOWaDIE uonnaduios-uou e jo asuasqe ay u! (je2de> GuIy20A uF aBUeYD 19U pue sasusdxa Ke) Suiodut ‘uj6sew ssou6 ayy us saBuey> oy speay osye jedi! aneGau aya) sasuacixa Bu! “erado pue anuanay ay) uo pedwi! annebau e ancy yeyy su!dwnsse 34 BuiBueYD sayy “puesnoya 968's§ 4 paeinDje> st oueuads jUaWaaI6e UO!aduIO?-UOU e YIM, ® JUN 1Z0Z 01 LOZ WO. POLIAd BY} 404 SMO|) YSED Key-s03}0 Jo anjen uasaid ay 35414 "PIB 2IgeL UL peruaseud 51 auawaziGe UONNedwWo>-UOU e yo UONeNjen ay, “ajqnsnpap xe1 10} pamoiie 30u 5 }uawiae,5e uojnaduios-uou ayy jo UoRespioWe ay) se palidde si gvLON « pue '9452 12 PaUINsse si JOI3ej Bulyaduio> Auyiqeqosd « €BL — SaNpar0ig 9Y>s5015 UONeN|eA gg