Microsoft Word peachtree case study

Page 106 of 141 The basis for using either of the methods under the Asset Based Approach is gaining a clear understanding of what assets and liabilities are to be included in the valuation of the subject. In the case of valuing the capital stock of an entity, all of the assets and liabilities should be considered. Other circumstances as defined by the specific situation and scope of the engagement will determine what assets and liabilities are to be valued under the Asset Based Approach. Based on reviewing the indicated values determined using the Market Approach Section 5.1) and Income Approach (Section 5.2), the appraiser believes that it is evident that the subject entity has unrecorded intangible assets therefore, the Asset Based Approach should be amended to include such procedures as to determine the approximate value of all intangible assets as part of the subject entity’s value. Revenue Ruling 68‐609 allows for the intangible assets of a business to be valued when no better method exists. The application of the excess earnings method (also referred to as the formula approach and more fully defined in Revenue Ruling 68‐609) to determine the unrecorded intangible assets is used generally when there is limited other reliable data available because it relies on a variety of subjective assumptions including
• Representative earnings into the future
• Fair market value of tangible assets
• Appropriate capital structure of the subject company
• Fair rates of return for the company’s equity and debt
• Fair rates of return for intangible assets Revenue Ruling 68‐609 explicitly states that, The formula approach should not be used if there is better evidence available from which the value of intangibles can be determined The appraiser believes that there is better evidence of value available, allowing other methods to be used namely, the private company transaction method under the Market Approach (Section 5.1) and the Single Period Capitalization

Page 107 of 141 Method under the Income Approach (Section 5.2). In addition, since the excess earnings method relies on the same assumptions as the Single Period Capitalization Method as well as other assumptions as noted above, the excess earnings method is one of the weakest of all methods considered and discussed in this report. Therefore, the appraiser has accorded the excess earnings method no weight in the final analysis and reconciliation of value and has included this discussion for demonstration and illustrative purposes only.

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