MULTI-PERIOD EXCESS EARNINGS METHOD
A financial valuation model often used in valuing customer-related intangible assets that estimates revenues and cash flows derived from the intangible asset and then deducts portions of the cash flow that can be attributed to supporting assets, such as a brand name or fixed assets, that contributed to the generation of the cash flows. These deductions are sometimes referred to as “supporting asset charges.” The resulting cash flow, which is attributable solely to the subject intangible asset, is then discounted at a rate of return commensurate with the risk of the asset to calculate a present value. Multi-period, excess-earnings method (MEEM or MPEEM): The multi-period excess earnings method is a method that can be used to value intangible assets. •This method is basically a DCF method that isolates the excess cash flows attributable to the intangible asset. It looks similar to a DCF, down to projected net income. MEEM is generally used for valuing intangible asset that is leading or the most significant intangible asset out of group of intangible assets being valued. The fundamental concept underlying this method is to segregate the earnings attributable to the intangible asset being valued. Intangible assets which have a finite life can only be used to value using MEEM. The value under this method is equal to the present value of the incremental after-tax cash flows (‘excess earnings’) attributable to the intangible asset to be valued over its remaining useful life.
The following are the major steps in deriving a value using the MEEM
- obtain the projections for the entity or the combined asset group over the remaining useful life of the said intangible asset to be valued from the client or the target to determine the future after tax cash flows expected to be generated
- analyse the projections and its underlying assumptions to assess the reasonableness of the cash flows
- Contributory Asset Charges (CAC) or economic rents to be reduced from the total net after-tax cash flows projected for the entity/combined asset group to obtain the incremental after-tax cash flows attributable to the intangible asset to be valued
- the CAC represent the charges for the use of an asset or group of assets (e.g., working capital, fixed assets, assembled workforce, other intangibles) based on their respective fair values and should be considered for all assets, excluding goodwill, that contribute to the realisation of cash flows for the intangible asset to be valued
- discount the incremental after-tax cash flows attributable to the intangible asset to be valued to arrive at the present value using an appropriate discount rate
- Tax amortisation benefit, if appropriate.
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