TFRS Update. Value. Adding Value to Cash Flow Models

Transcription

1 TFRS Update THE Value FACTOR Adding Value to Cash Flow Models

2 Lets meet the judges 2

3 Lets meet the contestant Contest acquired 100% of No-talent To get through to the final Contest needs to show the judges the value in fair value! 3

4 The auditions: What questions would you ask? 10 questions you could ask Choose 4 questions to help you understand the acquisition 4

5 The judges' questions answered 1) What did Contest pay for No-Talent? Contest plc acquired No-talent Ltd on 14 January 20x5 for CU25million. 2) Why did Contest acquire No-Talent? No-Talent has a number of global TV talent shows. These include Valuing with Stars Asset vs Business and GACS has Talent 3) What does No-Talent do? No-Talent sells rights to their brands to different international TV channels. It holds details of all the channels and speaks to them regularly. 4) Wh0 are No-Talents main competitors? No-Talent operates in a competitive market and has two significant rivals. 5

6 Initial PPA CU 000 Consideration 25,000 PPE 7,890 Other assets 1,300 Brands 9,112 Customer relationships 8,155 Liabilities (4,300) Goodwill 2,843 6

7 Who cares about fair value? 63% in % in % in

8 What is value in fair value? (lets ignore TFRS 13) Sell It Rent it out Knock it down and start again! 8

9 What is value in fair value? Market Sell It Approach Income Rent it out Approach Knock it down Cost and start Approach again! 9

10 Income Approach Three Primary Methods Income Approach (a) Relief-from-Royalty Method (b) With and Without Method (c) Multi-Period Excess-Earnings Method ( MEEM ) 10

11 Customer-related intangible assets Entity has information about the customer and Regular contact and Customer has the ability to make direct contact with the entity 11

12 Customer-related intangible assets - Example A newsstand in a large city has a number of customers who habitually purchase a daily newspaper. Is this a recognisable customer relationship? Customer base Entity does not know individual customers no communication possible Not an identifiable intangible asset 12

13 Customer-related intangible assets No-Talent sells rights to their brands to different international TV channels. It holds details of all the channels and speaks to them regularly. Customer base Entity therefore knows its customers and can communicate to them This is a potential identifiable intangible asset 13

14 First round auditions Instructions: review the cash flow model in Handout 3.1 You will need to identify: Errors in the model (no points for spotting errors in my maths!) Anything missing in the model? You have 10 minutes for this exercise Objective Identify errors in the model and what it is missing 14

15 Let s start with the errors - Revenue 5 % increase in total revenue inline with historic growth in P&L. 15

16 What have the judges got to say? Initial growth but then decline Only existing customers Attrition Customers won t stay forever. To improve you must built in an attrition rate Attrition 16

17 Sticky or not sticky Sticky Not sticky Traded commodity Not sticky Utilities Sticky 17

18 The votes are in CU 8,154,717 CU 2,412,559 V V18

19 Length of forecast 10 years based on management forecasts. Useful life of customer relationships in the accounts is 20 19

20 What have the judges got to say? Useful life is usually consistent with cash flows Terminal value I don t want to see a customer relationship with a life of 20 years. 20

21 Terminal Value When do you have a terminal value? Indefinite lived assets or an enterprise value? How do you calculate it? Perpetuity formula or market multiple What could go wrong? Too much growth Non-sustainable cash flows 21

22 An example of terminal value 22

23 Error 3 Costs 33% net profit margin used which is in line with historic margins. This includes cost saving synergies 23

24 What have the judges got to say? Margin in accounts is not necessarily existing customers Market participant assumptions The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. I think you need to work on your market participant assumptions 24

25 Determining fair value Market participants Buyers and sellers in the principal market Independent, unrelated parties Knowledgeable Able to transact for the asset or liability Willing, not forced to transact for the asset or liability Market perspective, not entity perspective! 25

26 Market Participant Assumptions Yes OR No An acquirer has the same customers as the acquiree. Does a customer relationship exist? YES A market participant may not have the same customers 26

27 The market participant v Yes No OR Maybe An acquirer will benefit from cost savings synergies should these be included in the cash flow? MAYBE It depends if a market participant would have the same synergies 27

28 The votes are in CU 8,154,717 Original Value CU 3,860,094 V CU 2,412,559 10% attrition 28

29 Discount rate This is based on the company's WACC. Inputs to the WACC have been checked and verified with a valuation expert 29

30 What have the judges got to say? Increasing liquidity Higher discount rate Cash Working capital Fixed assets WACC Customer Trademarks & Residual relationships brands goodwill For example 3.0% 4.5% 6.00% 10.0% 10.5% 11.0% 16.0% I m not sure your discount rate reflects the risk of a customer relationship 30

31 Discount rates It is less important than getting the cash flows right Increasing the discount rate for risk surrounding uncertain cash flows is not a substitute for getting the cash flows projections right A discount rate based on WACC is most commonly used CAPM is the most widely used methodology for calculating the cost of equity 31

32 The votes are in CU 8,154,717 - Original Value CU 3,860,094 Attrition and costs CU 3,377,518 V V 32

33 What was missing from the act 1. Contributory asset charges 2. Tax amortisation benefit There are a few things missing from your act. Correct these and you could secure a place in the final! 33

34 Contributory Asset Charges (CAC) Other assets contribute to the cash flows of the business Need to isolate cash flows for the specific asset being valued CAC charges for the contribution of other assets Hypothetical economic rent 34

35 The votes are in CU 8,154,717 - Original Value CU 3,377,518 CU 514,112 V 35

36 Tax amortisation benefit Fair Value TAB Present value of tax benefit acquirer can realise What a participant would pay? Value calculated before TAB Asset acquired separately in an asset deal Internally developed asset acquired as part of a business combination 36

37 Tax amortisation benefit FV of brand 450 Tax base Tax amortisation Tax benefit (30%) Discount factor Discounted tax benefits PV of tax benefit 97 37

38 Tax Amortisation Benefit Calculation of step-up factor Year 1 Year 2 Year 3 Year 4 Tax rate X Present values of amortisation factors in t 0 = Total tax savings in % Step-up factor = 1 / (1-Total tax savings in %) Saved 97/450 = 22% 450 = 78% of the value 100% of the value = * 1/ (1-(97/450)) =

39 The final Fair value and tax base 514,222/10 years Tax effect Present value of 10 years Tax saving Fair value 514,112 51,411 51,411 x 23% = 11,825 66,811 66,811/514,112 = 13% 100% = 590,902 VCU 8,154,717 V CU 590,902 39

40 Quiz to win True OR False The TAB is calculated for the market and income approach False Acquirer related synergies are included in the value of identifiable intangibles False The MEEM valuation method is often used for the principle intangible asset True There is a preferred valuation approach in TFRS 13 False The discount rate for an intangible asset will usually be higher than the cost of capital, or WACC. True 40

41 The judges steps to success Underst and the entityand t ransaction Assess the reasonablen ess of the cash flows Have the appropriate adjust ments been made? Discount rate? Does it sound right? 41

42 Double check with your coaches By its very nature, valuation work cannot be regarded as an exact science and the conclusions arrived at in many cases will of necessity be subjective and dependent on the exercise of individual judgment. CONSULT TO WIN 42

43 Q&A Pw C Thailand helps organisations and individuals create the value they re looking for. We re a member of th e network of firmsin 158 countrieswith close to 169,000 people. We re committed todelivering qu a lity in assurance, tax and advisory services. Tell us what m atters t oyou and find out more by visiting us a t T h is publication has been prepared for g eneral guidance on matters of iblmf gtjthijoy5w. 46s mverest only, a n d d n jm;lkhtzdn9u0t0goes n ot constitute professional advice. You should not act upon the information con tained in this publication without obtaining specific professional advice. No representation or warranty (ex press or implied) is g iven as t othe accuraicy or com pleteness of the information contained in this pu blication, and, to the extent permitted by law, PricewaterhouseCoopers does not accept or assume any lia bility, responsibility or duty of care for any consequences of y ou or anyone else acting, or refraining t o a ct, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers ABAS Ltd. All rights r eserved. "PricewaterhouseCoopers" and/or "" r efers t othe individual members of the PricewaterhouseCoopers organisation in Thailand, each of which is a separate and independent legal entity. Please see for further details. 43