Intangibles Valuation, Purchase Price Allocation (PPA) and Goodwill Impairment

Abstract

We start by outlining the key requirements of IAS 38 Intangible Assets in conjunction with relevant aspects of IFRS 3 Business Combinations. We proceed to briefly outline the three broad approaches to intangibles valuation—market, income, and cost approaches. We then proceed to examine selected standard intangible valuation techniques in more detail, with examples—the relief from royalty model, the replacement cost model, the with and without model and the multi-period excess earnings model. We then take up lifing—models to estimate the life of intangibles. We show with an example how intangibles life can be determined by fitting a survival curve based on a Weibull distribution. We also briefly discuss Iowa type curves as alternatives to the Weibull survival curve. We turn next to purchase price allocation (PPA) in a takeover. This is the task of apportioning the purchase price of the acquired company among its various assets and goodwill, with the assets including newly-identified intangibles. We turn next to the task of fair-valuing NCI. We consider two approaches to fair-valuing NCI. Firstly, we consider a top-down model that starts with a model of equity based on a control perspective, and then successively applies discounts for lack of control and for lack of marketability. Secondly, we explain a bottom-up model that attempts to directly project the cashflows due to NCI and to discount them at a rate that is specific to NCI. Finally, we discuss the impairment of goodwill with an example. We focus on the calculation of value in use.