Skip to content

ACCA Strategic Professional · Advanced Financial Management · Valuation for acquisitions and mergers

Zeta plc is considering acquiring Kobo Ltd, a software firm whose main value lies in customer relationships, a trained workforce and proprietary code. Which approach to valuing these intangibles is most consistent with the income-based methods used in AFM?

Intangibles are best valued by discounting the incremental after-tax cash flows they are expected to generate at a rate reflecting their risk. Historical cost or tangible net book value ignores future benefits, and intangibles can be valued separately using income-based methods.

  1. ADiscount the incremental after-tax cash flows attributable to the intangible at a rate reflecting its riskCorrect
  2. BRecord them at the historical cost incurred by Kobo in developing them
  3. CValue them at the net book value of Kobo's tangible assets
  4. DIgnore them because intangibles cannot be separately valued

Explanation

Income-based valuation estimates the future cash flows that the intangible generates (for example, relief-from-royalty or excess earnings) and discounts them at a risk-appropriate rate. Historical cost is not a measure of future benefit, and tangible book value excludes the intangibles altogether.

Did you get it right without looking?

One question tells you little. A timed set on Valuation for acquisitions and mergers shows your real accuracy, how long you take and where you lose marks.

Practise Valuation for acquisitions and mergersFree diagnostic mock

More Valuation for acquisitions and mergers questions