The purchase price of an operating business is
usually attributable to net tangible assets and intangible
assets, such as customer relationships or a brand name.
Intangible assets may comprise a sizable portion of the total
Reporting entities are required to allocate the acquisition
cost to (and separately recognise) the target's
"identifiable" assets, liabilities and contingent
liabilities at their fair values at the acquisition date
(subject to certain provisos).
Identifiable assets arise from contractual or other legal
rights or are capable of being separated from the entity and
transferred or rented. Examples include customer contracts and
related customer relationships, customer lists, trade names,
domain names and computer software. Consequently, a
target's qualifying intangible assets must be valued by
reporting entities at their fair values for financial reporting
Goodwill, if any, is recognised as the residual cost of the
business after recognising the above items. Before the
introduction of Australian equivalents to International
Financial Reporting Standards (AIFRS), goodwill was usually
recognised as the acquisition cost in excess of net tangible
More acquirers are mandating intangible asset valuations
earlier in the transaction process to supplement due diligence
and offer transaction pricing insights. Reasons include the
Key Business Drivers
The identification and valuation of intangible assets
typically includes a detailed analysis of the key business
drivers, with a commercial focus. For example, customer
relationships valuation considerations may include the
What proportion of the purchase price is for existing
customers (identifiable intangible asset) versus potential
new customers (goodwill)? What is the relative required
return and value for these two asset groups?
What proportion of projected revenue growth is
attributable to existing customers versus potential new
customers? What is the anticipated revenue growth and profit
margins of each customer group?
How "sticky" are customers? Are all customers
homogenous? If not, should certain customer groups be valued
Often the nature of the industry drives anticipated
customer retention rates. The table below provides a
snapshot of the customer relationship amortisation periods
(estimated life) and implied average attrition rates
(assuming straight-line) of selected ASX-listed companies
in each designated industry:
Implied Average Annual Attrition Rate
10 – 20
5 – 10
10 – 20
5 – 10
3 – 8
12 – 33
What are the working capital requirements of each
customer group? What are the valuation implications?
Split Of Intangible Assets
Under AIFRS, intangible assets are split into smaller and
more meaningful components (i.e. qualifying intangible assets
and residual goodwill). In turn, goodwill is usually a smaller
and more understandable number, only representing a payment
made in anticipation of future economic benefits from assets
that are not capable of being individually identified and
In light of these examples, acquirers are encouraged to
consider intangible asset valuations earlier in the transaction
process to maximise the insights available from the valuation
The content of this article is intended to provide a
general guide to the subject matter. Specialist advice should
be sought about your specific circumstances.
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