Valuation for financial reporting under SFRS(I) and IFRS

Purchase price allocation SFRS(I) 3

When one company acquires another, the consideration has to be allocated across the identifiable assets and liabilities acquired, with the residual recognised as goodwill. It looks mechanical and is not. The judgement sits in three places: which intangibles meet the recognition criteria at all, what each of them is worth on its own, and whether the resulting goodwill figure is credible.

What the work involves

• Identifying intangible assets that are separable or arise from contractual and legal rights — customer relationships, brands and trade names, technology and know-how, order backlog, distribution networks, non-compete undertakings, licences, patents and software
• Valuing each identified intangible using the method that fits its economics: multi-period excess earnings for customer relationships, relief-from-royalty for brands and technology, with-and-without for non-competes
• Reconciling the internal rate of return implied by the transaction against the weighted average cost of capital and the weighted average return on assets — the WACC-IRR-WARA cross-check that reviewers look for first
• Testing the reasonableness of the residual goodwill, or of any bargain purchase gain
• Valuing contingent consideration and earn-out arrangements, and any profit guarantee or similar financial liability arising from the deal
• Determining fair value of assumed liabilities and, where relevant, previously held interests

A recognised intangible amortises through profit and loss; goodwill does not, but it becomes a permanent impairment testing obligation. The allocation therefore shapes reported earnings for years, which is why auditors examine it closely and why doing it late — after the numbers have been signalled to the market — is uncomfortable.

Our published assessments in this area are collected on the main site under purchase price allocation.

Goodwill and asset impairment SFRS(I) 1-36

Impairment testing turns on three questions that have to be answered in order, and the first one causes the most trouble.

Identifying the cash-generating unit

A CGU is the smallest group of assets generating cash inflows largely independent of other assets. The valuation model has to cover exactly the same asset composition that the CGU carries in the accounts — no more, no less. Mismatches between the carrying amount tested and the cash flows modelled are the most common finding in impairment reviews, and they usually originate in how the CGU was drawn rather than in the arithmetic.

Isolating the cash flows

Group forecasts are rarely built along CGU lines. Isolating the revenue, cost base, working capital and capital expenditure attributable to a single unit — and treating corporate allocations consistently — is often the largest part of the engagement.

Climate assumptions inside the model

Transition and physical climate risks now feed directly into impairment inputs — demand forecasts for carbon-intensive products, capital expenditure to meet emissions commitments, asset useful lives, and the discount rate. Where a company publishes climate-related disclosures under IFRS S2, those disclosures and the impairment model have to describe the same future. Auditors increasingly read them together. We prepare valuations with that consistency in mind, drawing on GreenCo ESG Advisory, our associated sustainability consultancy, where the climate inputs need building rather than merely referencing.

Measuring the recoverable amount

Recoverable amount is the higher of fair value less costs of disposal and value in use. The two are not interchangeable: value in use is measured on the asset in its current condition using a pre-tax rate and excludes the benefit of future restructuring or enhancement, while fair value reflects what a market participant would pay. Where the two produce different answers, the report explains why.

Intangible assets SFRS(I) 1-38

Outside a business combination, intangibles come up on licensing arrangements, internal restructuring, contributions in kind, brand transfers between group entities and impairment testing of specific assets. Our experience spans trademarks and brand names, mining and concession rights, technical know-how, franchise agreements, copyrights, domains, backlog sales, customer relationships, distribution networks, non-competition agreements, licences, patents, software and assembled workforce.

Portfolio and investment fair value SFRS(I) 9

Fund managers, family offices, corporate venture arms and holding companies all have to re-measure unlisted positions at fair value at each reporting date. Historical cost is not an acceptable long-run proxy, and the practice of carrying an investment at the price paid until exit does not survive audit.

Our portfolio work uses market-based benchmarking supported by internal and external data tooling, so a portfolio of many positions can be re-measured consistently and quickly, with trend analysis across reporting periods rather than a set of unrelated one-off exercises. Reporting can be aligned to IPEV guidance where investors expect it, and 409A-style analysis is available for portfolios with US-linked reporting obligations.

See also private equity portfolio valuation on the main site.

Expected credit loss SFRS(I) 9

Entities carrying trade receivables, intercompany loans, lease receivables or debt investments have to recognise expected credit losses on a forward-looking basis. For non-bank corporates the practical difficulty is usually data: limited default history, concentrated counterparties and intercompany balances that have never been assessed for recoverability. We build proportionate models — provision matrices where that is appropriate, probability of default and loss given default frameworks where exposures justify it — with the macroeconomic overlay documented rather than asserted.

Published references on this work are collected under expected credit losses.

Other reporting measurements

• Investment property under the fair value model, including assessment of tenure, location, floor and saleable area, and condition
• Inventory net realisable value where the auditor requires independent support
• Biological assets measured with input from specialists on species, specification, health, quality, age and life span
• Share-based payment — covered in detail on our employee share plans page
• Financial instruments including convertibles, preference shares and derivatives — see financial instruments valuation

Valuation review and model validation

Sometimes the need is not a new valuation but assurance over an existing one. We review valuations prepared by management or by another firm, either as a full second opinion or under an agreed-upon procedure covering specific components — methodology selection, key assumptions, calculation integrity, discount rate derivation. This is frequently the fastest way to resolve an audit impasse without redoing the entire exercise.

Frequently asked questions