Intangible assets are becoming increasingly important to businesses and companies, with their contribution to the market value of S&P 500 firms rising from 17 per cent in 1975 to 84 per cent in 2015. As the COVID-19 pandemic continues to cause economic uncertainties, valuers must exercise heightened diligence and consider adjustments to their valuations for both intangible assets and traditional tangible assets, said experts from accountancy firm KPMG in Singapore. They were speaking at a recent session of the Singapore Institute of Directors’ AC Chapter Pit-Stop Series, themed “Intangible Assets In A Tangible World”.
Improving valuation inputs
While the income approach is the one most commonly used to value intangible assets, it relies on two key inputs, namely discount rates and projected cash flows. Both inputs are challenging to select and determine respectively, especially in the wake of current business uncertainties, said Mr Jamesy Laya, a Partner in Valuation Services at KPMG in Singapore. He made the following suggestions:
Clarifying cash flow projections
Valuers should also scrutinise four factors that could affect cash flow projections themselves, highlighted Mr Loh Yee Chuan, Director of Valuations, Corporate Finance at KPMG in Singapore. He explained:
Adjusting valuation approaches
If valuers foresee considerable variability in a business’s future cash flow, they should prepare multiple cash flow scenarios for their valuation, said Mr Loh. “You could build a base case scenario, an optimistic scenario and a pessimistic one, and take a probability weighted scenario approach when you do your valuation,” he recommended.
On the other hand, valuers taking the market approach should base their valuations on trailing multiples rather than forward multiples.
“Trailing market multiples continue to be applicable since the numerator is calculated based on stock prices that would have incorporated the impact of COVID-19 and the current economic environment, and the denominator is on the same basis across comparable firms and the entity being valued,” he explained.
“Forward multiples are calculated using a current numerator and a forward denominator, and are trickier to use now because of the difficulty in forecasting the future metric.”
Keeping an eye on developments
Mr Vishal Sharma, a Partner in KPMG in Singapore, added that valuers should have a firm grasp of developments in equity markets and sectors around the world, since these will influence many valuation inputs, such as the discount rates that should be used. He observed that:
Not business as usual
“What all of this means is that it is not business as usual when it comes to valuations,” said Mr Loh. “With the current outlook, greater care is needed when applying generally-accepted approaches. We cannot just continue to apply what we have done previously. Valuers need to look into the situation right now and critically assess their valuation inputs given the economic uncertainties.”