Valuation techniques used under the three valuation approaches is a complete overview of valuation techniques useable under IFRS 13. The following are examples of different valuation techniques used under the three valuation approaches (Market approach, Income approach and Cost approach), and examples of common usage of those techniques.
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Market approach |
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Technique |
Examples of common usage |
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Quoted price in an exchange market |
Equity securities, futures |
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Quoted prices in dealer markets |
-On-the-run US Treasury notes -To-be-announced (TBA) mortgage- backed-securities |
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Market multiples derived from a set of comparable assets (e.g. a price to earnings ratio expresses an entity’s per-share value in terms of its earnings per share) or transaction price paid. |
Unlisted equity interests |
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Debt securities similar to benchmark quoted securities |
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Income approach |
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Technique |
Examples of common usage |
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Present value techniques |
-Debt securities with little, if any, trading activity -Unlisted equity instruments |
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Black-Scholes-Merton model or lattice model |
Over-the-counter European call option or American call option |
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Multi-period excess earnings method: based on a discounted cash flow analysis that measures the fair value of an asset by taking into account not only operating costs but also charges for contributory assets; this isolates the value related to the asset to be measured and excludes any value related to contributory assets |
Intangible assets, such as customer relationships and technology assets, acquired in a business combination Valuation techniques used under the three valuation approaches |
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Distributor method (DM) |
The DM is appropriate to use when another intangible asset (i.e., technology or trademark) other than the customer relationship asset is determined to be the primary asset of the company, while the customer relationship asset is determined to be the secondary asset. |
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Intangible assets expected to be used actively (e.g. brands) |
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Intangible assets, such as on-demand technology, determine the value of the business with technology versus without technology. |
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Valuation of start-ups using start-up costs, ramp-up and commercialisation pattern, margins and capital costs. |
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This is more of a method to compare the financial results of the different alternatives as well as carrying out “what if” analysis. |
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Cost approach |
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Technique |
Examples of common usage |
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Depreciated replacement cost (DRC) method: considers how much it would cost to replace an asset of equivalent utility taking into account physical, functional and economic obsolescence; it estimates the replacement cost of the required capacity rather than the actual asset Valuation techniques used under the three valuation approaches |
Factory plant and equipment Valuation techniques used under the three valuation approaches Valuation techniques used under the three valuation approaches
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Adjusted net asset method |
Aggregated revaluation of all of an entity’s total of net assets |
More than one valuation approach or technique
An entity should consider, among other things, the reliability of the valuation approaches and techniques and the inputs that are used in the approaches and techniques. If a particular market-
based approach relies on higher-level inputs (e.g. observable market prices) compared to a particular income-based approach that relies heavily on projections of income, the entity will often apply greater weight to the measurement of fair value generated by the market-based approach because it relies on higher-level inputs. [IFRS 13 61, IFRS 13 BC142]
An entity should maximize the use of relevant observable inputs and minimize the use of unobservable inputs. Therefore, higher-level inputs that are available and relevant should not be ignored. [IFRS 13 61] Valuation techniques used under the three valuation approaches
Any, or a combination of, the approaches and techniques discussed for IFRS purposes can be used to measure fair value if the approaches and techniques are appropriate in the circumstances. However, when multiple valuation approaches or techniques are used to measure fair value (e.g. when valuing a reporting unit for impairment testing purposes), IFRS 13 does not prescribe a mathematical weighting scheme; rather it requires judgment. [IFRS 13 63]
In many cases valuation professionals produce an evaluated price that uses a market approach based on observable transactions of identical or comparable assets or liabilities and an income approach that is calibrated to market data.
When multiple valuation approaches and techniques are used to measure fair value, the approaches and techniques should be evaluated for reasonableness and reliability, and how they should be weighted. The respective indications of value should be evaluated considering the reasonableness of the range of values indicated by those results. The objective is to find the point within the range that is most representative of fair value in the circumstances. In some cases, a secondary method is used only to corroborate the reasonableness of the most appropriate valuation approach or technique. [IFRS 13 63]
Valuation techniques used under the three valuation approaches
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