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Valuation of Customer-Related Assets

Value Attributes

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The savings are quantified by giving consideration to employment advertising, agency fees, reimbursed applicant expenses, relocation expenses, corporate employment staff compensation, line management interview time, departmental orientation time and learning curve inefficiencies.

Stock options are generally valued using an accepted options pricing model, of which there are many, including the well known Black-Scholes option pricing model. These models determine either the econometric or theoretical value of the instrument - that is, the price at which the option should sell in the marketplace.

Generally, the internal revenue service and SEC are concerned that although the issuer of a stock right intended to establish an exercise price not less than the fair market value of the stock at the time of grant, the issuer of the stock right may not be able to demonstrate that the exercise price of the stock right was determined using a reasonable valuation method.

Accordingly, where a taxpayer can demonstrate that the exercise price of a stock right granted was not less than the fair market value of the stock at the date of grant and that the value of such stock was determined using a reasonable valuation method, then that valuation will meet the requirements. Option models are based on the assumption that it is possible to set up a perfectly hedged position consisting of owning the shares of the stock and selling a call option on the stock.

Any movement in the price of the underlying stock will be offset by an opposite movement in the option's value, resulting in no risk to the investor. In general, an option's primary terms include the term of the option, its exercise price, its vesting period, the exercise period and any transferability provisions.

As such, in conducting option valuations, it is important to consider these factors and several others, including: For financial reporting purposes, all business combinations should be accounted for in the same way that other asset acquisitions are accounted for - based on the values exchanged. 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.

Fair value considers synergies and attributes of a specific buyer, not of a hypothetical willing buyer. Therefore, fair value may represent a higher value if specific buyers have anticipated and were willing to pay for the expected synergies. In performing our appraisals, Cambridge Partners follows generally accepted appraisal standards, as promulgated by the American Society of Appraisers ASA. A fair value measurement is for a particular asset or liability.

How do you determine the value of a Non-Competition Agreement non- compete agreement? In valuing a non-compete agreement the appraiser must first determine the amount of lost revenues that could occur if the seller in the absence of the non-compete agreement were to compete with the company. The appraiser must then capitalize lost revenue and earnings utilizing an appropriate discount rate adjusted for among other things, growth in profitability.

Does Cambridge Partners perform intellectual property appraisals for transfer pricing strategies? Cambridge Partners performs transfer pricing studies for purposes of international transfer pricing and state and local tax transfer pricing strategies.

These methods are the: Core deposits can be valued a number of ways. Generally a cost savings method, an income approach, is utilized when valuing an acquired core deposit base. This is the approach that was allowed in the Citizens and Southern Bancorporation Tax Court Case and other subsequent cases involving core deposit intangibles.

The premise underlying this approach is that a rational buyer would be willing to pay a premium to obtain a group of core deposit accounts only if the accounts are a source of funding that is less expensive than the buyers' marginal cost of funds. There are various ways to appraise a franchise agreement, inlcuding the market approach and various methods of the income approach. One of the most frequently utilized methods utilized is the "with" and "with-out" method.

In this approach, a discounted cash flow model is developed to compare and contrast the projected cash flows assuming the franchise agreements are in place and not in-place.

The cash flow stream is discounted to the present to obtain an indication of fair value. The most common starting point in estimating future cash flows is the prospective financial information prepared by or in close consultation with the management of the subject business.

In applying the MPEEM to customer-related assets, valuation professionals first identify the portion of prospective revenues that is expected to be generated through repeat business from customers existing at the valuation date. It is often useful to examine estimated future revenue as the product of revenue per customer and the number of retained customers. Fair value measurement requires that valuation professionals consider prospective revenue from a market participant perspective and exclude any firm-specific synergies that may be embedded in the prospective financial information prepared by management.

As discussed earlier, customer-related assets derive value within a finite period as the numbers of customers that provide repeat business can be expected to decline over time. Good estimates of expected attrition can be obtained by conducting statistical analyses of historical customer turnover and revenue growth rates. When historical customer data of sufficient quality is not available, it may be necessary to rely on management estimates or an examination of industry characteristics in developing customer attrition rates.

After the identification of prospective revenues attributable to the base of customers existing at the valuation date, valuation professionals estimate earnings based on expected profitability of the business. It is important to consider only the operating costs relevant to the base of existing customers from a market participant perspective. Marketing costs that are expected to be necessary in finding new customers and firm specific cost synergies, for instance, are not relevant in projecting earnings on expected revenue from existing customers.

Cash flow attributable to the customer-related asset is isolated from the estimated earnings by assessing contributory charges for other assets of the subject business. As discussed earlier, a number of other assets need to be in place for firms to extract value from customer related assets.

The contributory charges represent economic rent equivalent to returns on and returns of assets necessary to produce goods or services marketed to the customers. Mercer Capital has valued customer-related assets to the satisfaction of clients and their auditors across a multitude of industries.

Please contact us to explore how we can help you with acquisition accounting or impairment tests. Mercer Capital monitors the latest financial reporting news relevant to CFOs and financial managers. The Financial Reporting Blog is updated weekly. Follow us on Twitter at MercerFairValue. Value Attributes Three key attributes are important in considering the value of customer-related intangible assets: The expectation of repeat patronage creates value for customer-related intangible assets.

Contractual customer relationships formally codify the expectation of future transactions. Even in the absence of contracts, firms look to build on past interactions with customers to sell products and services in the future. Two aspects of repeat patronage are important in evaluating customer relationships. First, not all customer contact leads to an expectation of repeat patronage. The quality of interaction with walk-up retail customers, for instance, is generally considered inadequate to reliably lead to expectations of recurring business.

Second, even in the presence of adequate information, not all expected repeat business may be attributable to customer-related intangible assets. Some firms operate in monopolistic or near-monopolistic industries where repeat patronage is directly attributable to a dearth of acceptable alternatives available to customers.

In other cases, it may be more appropriate to attribute recurring business to the strength of the trade names or brands. Customer-related intangible assets create value over a finite period. Without efforts geared towards continual reinforcement, customer lists dwindle over time due to customer mortality, the ravages of competition, or the emergence of alternate products and services.

The mechanics of present value mathematics further erode the economic benefits of sales to current customers in the distant future. Customer relationships are wasting assets whose economic value deteriorates with the passage of time. Customer-related intangible assets depend on the existence of other assets to provide value to the firm.

Most assets, including fixed assets and intellectual property, are essential in creating products or providing services.

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IFRS 3 — Customer-related intangible assets; contractual relationships and information about a customer’s prior purchases would be important inputs in valuing a customer relationship intangible asset but should not determine whether it is recognised.

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Using MPEEM to value the customer relationships intangible asset in business combinations. Customer-related intangible assets are those intangible assets that occur as a result of interactions with outside parties. Customer relationship intangible assets should be identified as separable in the company’s accounting records.

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Customer relationships form a key intangible asset for firms operating in many industries. Firms devote significant human and financial resources in developing, maintaining and upgrading customer relationships. Therefore, customer contracts and the related customer relationships are intangible assets that meet the contractual-legal criterion. This Statement requires that those intangible assets be recognized as assets apart from goodwill even if confidentiality or other contractual terms.

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Businesses employ a variety of tangible and intangible assets in their operations that work together to generate cash flows. Intangible assets, such as customer relationships, trademarks, technology, and employees, are generally key value drivers for a business. Frequently, the intangible value of a business is greater than its tangible value. Frequently Asked Questions - Intangible Asset Valuation. What does the Financial Accounting Standards Board (FASB) say about valuing intangible assets under FASB and ? What is the proper methodology for determining the fair value of customer relationship intangibles? the remaining useful life of the customer relationship asset.