The internationally accepted asset evaluation methods are mainly cost approach, market approach and income approach. The evaluation of goodwill also follows these three methods.
(1) Cost approach The cost approach starts with the various costs and expenses of a company creating a trademark and forming goodwill, calculates its complete replacement cost under current conditions, and then deducts various losses (mainly Various economic losses) to estimate the value of goodwill.
The value of goodwill is created by labor, but its value has no direct correspondence with the input cost. People judge whether a company's goodwill is valuable or not, and how much it is worth, not based on its cost, but mainly based on whether it can create benefits and whether it has market competitiveness. This greatly limits the application of the cost approach. And rarely used. When taking a cost approach, analysts need to estimate the current costs required to recreate the components of the target goodwill intangible asset. The most common cost approach is often called the component build-up method. The first step of the element composition method is to list the various elements that constitute the target goodwill; the second step is to estimate the cost required to recreate each element. This method is based on the concept of the value of goodwill as a deposited asset and a standby asset.
When recreating all elements of a going concern related to target goodwill, the element composition method is commonly used to analyze the expected benefits (such as opportunity costs) created during the period. For example, we assume that it takes two years to recreate all the assets (tangible and intangible) of the target enterprise, including the purchase and installation of all equipment, the construction or purchase of all real estate, the selection of suppliers, the establishment of a sales system, Employee training, establishment of customer awareness and trust, and re-establishment of customer relationships (matching the actual operating conditions of the target enterprise). We can also assume that during the two-year reinvention period, the target company's annual earnings reach $10 million. The present value of the opportunity cost of $20 million during the recreation period is an estimated value of the goodwill of the target intangible asset.
(2) Market approach
The market approach is the result of comparing with each reference and adjusting the differences.
There are two common methods of market approach. The first method is to use the residual value after deducting the value of tangible assets and other identifiable intangible assets from the actual purchase price of the target enterprise as the assessed value of goodwill. The second approach is to base the value of goodwill on actual guided sales transactions. Goodwill intangible assets are rarely completely separated from other assets and sold separately. Therefore, guided sales transactions usually involve going concerns or professional institutions. In such transaction materials, it is disclosed that the sales price is allocated between goodwill and all other assets. This means that even the second method relies on the residual value in the sales price to assess the value of goodwill.
When using the purchase price residual method for evaluation, there must be corporate sales behavior related to the target goodwill. First, the analysis should confirm that the target sale is a normal transaction. Secondly, during analysis, it should be confirmed that the purchase price represents the price of cash equivalents. If there are non-cash payment methods or deferred payments, such as an earn-out provision, analysts should convert the various payment methods into cash equivalents. Third, analysts should value all identifiable tangible and intangible assets of the target enterprise. Fourth, analysts should deduct the overall value of all identifiable tangible and intangible assets from the total purchase price, and the remaining value is the value of goodwill-type intangible assets.
When using the guided sales transaction method for analysis, analysts should identify and select actual transactions that are sufficient for comparison with the target enterprise as reference objects. For some industries (such as professional organizations), these guidance sales transaction materials are generally published in publications and journals, so they are easily accessible. In these empirical transactions, goodwill is often expressed as a percentage of the entire transaction price or as a percentage of the target's annual sales revenue. These market-derived pricing multiples are then applied to the target business to arrive at the value of the target's goodwill.
Of course, we should note that the estimate of the pricing multiple derived from the market is based on the allocation of the sales price of each enterprise or professional institution in the data source.
(3) Income channel
The income channel is the future excess income expected to be brought by trademark goodwill, which is discounted and determined as the current value. The evaluation value of goodwill depends on its use value, that is, its survival, competition, development, and profitability. Only when it can be recognized by the market can goodwill have real value. This is the starting point of the income approach. Since the value of goodwill lacks a direct connection with the costs invested in its formation, and often depends on the excess returns they can bring in the future that exceed the average level of the same industry, the evaluation of goodwill is more often used. It is a way of income.
II. The excess income method for goodwill value evaluation
(1) Applicability analysis of the excess income method
The theoretical basis of the excess income method has changed with the reform of our country With the further deepening of opening up and the establishment and improvement of the socialist market economic system, science and technology have developed rapidly, production has become more socialized and specialized, and international economic ties have become closer and closer. In such an era of knowledge economy, , intangible assets are playing an increasingly important role. International corporate investment not only uses tangible assets to invest, but also uses intangible assets as the price of investment. Not only are more and more investments, but the proportion is increasing day by day. Intangible assets such as goodwill that are not reflected on the balance sheet are especially important when companies invest abroad. The key point is to accurately assess goodwill.
1. The basic characteristics of goodwill are unidentifiable resources owned or controlled by an enterprise that can bring excess economic benefits to the enterprise
In the early 1920s, Yang Rumei In his theory of intangible assets, Mr. Wang pointed out: "Anything that can enable an enterprise to generate a higher than ordinary income can be called goodwill." In the definition of goodwill by subsequent theorists , still can't get over it. my country's "Accounting Standards for Business Enterprises" also defines goodwill as an enterprise's ability to obtain excess returns. The excess income method is based on the view that goodwill is "the ability of an enterprise to obtain excess profits" and can be applied both when an enterprise has an overall merger or not. Therefore, as long as an enterprise demonstrates its ability to obtain excess returns, its goodwill can be evaluated.
2. The nature of goodwill determines the excess income method used to evaluate goodwill. The three-dimensional theory of the nature of goodwill, namely "favorability value theory", "total pricing account theory" and "excess income theory", are all in Goodwill assessment has played different roles in the development process. The rationale of the "favorability value theory" lies in the fact that people have good and bad impressions of a company, and a good corporate image is a factor for companies to obtain excess returns. Customers' favorable impression of a company may come from favorable geographical location, advanced production technology, exclusive privileges, and good management and management standards, etc. However, it is extremely difficult to value these attributes individually. The value of goodwill is not calculated by summing the individual valuations of these intangible attributes. Therefore, the value of goodwill towards a company is difficult to measure in monetary terms. We have discussed the shortcomings of goodwill assessment supported by the "total valuation account theory" before, so we won't go into details here. We can see that the total valuation account theory has evolved from accounting calculations to mathematical calculations, completely ignoring the true nature of goodwill and making no sense from a qualitative point of view. Through the analysis of the other two theories in the ternary nature of goodwill, "the excess income method is the theoretical basis for goodwill assessment, and its rationality and advantages are revealed one by one. The scientific nature of the excess income theory lies in: the grasp of this point of view The basic conditions of goodwill as an asset - economic resources, profit potential, and monetary measurement
3. Goodwill is a dynamic concept
Its existence lies in the enterprise. Compared with the same industry, do some of the original exclusive advantages still exist? If these were once the exclusive advantages for enterprises to obtain excess profits, they have become indispensable for the survival of the enterprise and are owned by other enterprises and have become common. At this time, the basis for the existence of goodwill is eliminated. The existence of goodwill is affected by many factors, which can be roughly divided into two types: external factors, including political, economic situation, industrial policy, and consumer trends. wait.
Intrinsic factors include product quality, technology, management and promotion, etc. The formula is a static measurement method and cannot be better consistent with the connotation of goodwill. The excess income law is based on dynamic measurement, that is, by calculating the excess income compared with the same industry to determine the value of goodwill, which more reflects the profitability of the company's economic resources.
4. Goodwill is an intangible asset, and its establishment may not necessarily involve various costs.
The value formation of goodwill is based on excess income. It has no direct relationship with the enterprise's expenditure to form goodwill. So it’s not that the more a company spends on goodwill, the higher its appraised value will be. Although the expenses or labor fees incurred will affect the assessed value of goodwill, they can be reflected by the increase in future expected earnings. This cost-independence makes the evaluation of goodwill based on excess earnings, which is different from the cost method-based evaluation method in tangible assets.
(2) Principle of excess income method
Goodwill right is an exclusive exclusive right. It is not transferred as general commodities and means of production, but based on their profitability. to transfer. Their prices are therefore not based on their own costs, but on their incremental revenue. Buyers are willing to pay the price precisely because they can create excess returns for the company in the future, which is the basis of the excess returns method. The basic idea of ??the excess income method is to estimate the excess income that goodwill brings to the enterprise, that is, the contribution share of the trademark or goodwill in the new income after the enterprise purchases the goodwill, and then discount it at a certain rate to obtain the business the assessed value of reputation. That is:
Goodwill = the company's annual expected excess income × annual discount rate
In this formula, it is necessary to determine the annual expected excess income, discount rate, and discount period .
(3) Determination of excess profits
There are many factors that affect the excess profits of enterprises. To sum up, they mainly include: 1) The quality of enterprises: the technical level of enterprise employees, processing technology methods, Enterprise management, equipment, tools, materials, etc., which is a comprehensive reflection of the overall quality of the enterprise; 2) Market environment: the market share of the enterprise's products, the competitiveness of the products, etc.; 3) The role of the enterprise and its products in the national economy Status: Is it an emerging industry or a general industry, a high-tech enterprise or a traditional enterprise, etc. These factors should be comprehensively considered during the assessment to reasonably anticipate the company's excess earnings due to goodwill.
In valuation practice, due to the difficulty in predicting forward returns, annual excess returns within a certain period are usually forecast, and then assuming that the excess returns in subsequent years are the same as the accurately estimated excess returns in the last year, the Its segmented processing. Actual excess returns are affected by a variety of economic factors, and we must pay special attention to the impact of accidental, exceptional or special factors. For example: the current owner of goodwill enjoys certain legal and administrative privileges or special restrictions, which results in high or low corporate income, and these rights or restrictions cannot be transferred together. Since the evaluation results are used as a reference for normal market transactions, the actual excess earnings with the above deviations must be corrected to eliminate accidental and special factors and obtain the benefits of using trademarks or utilizing goodwill under normal market conditions. The excess return value obtained, of course, should include reasonable expectations of future returns and risks.
(4) Determination of the discount rate
Due to the time value of funds, the same amount of money will not have the same value in the future as it does now, so the excess in the future must be Earnings are discounted. The future expected rate of return selected for the evaluation of goodwill is mainly the discount rate and capitalization rate. The discount rate is suitable for converting future income into the present value in a certain period, and the capitalization rate is suitable for permanent, continuous and cyclical future income. The two are just different in form, but they are essentially the same, so we collectively call them discount rates. The discount rate is an important parameter for goodwill evaluation, and its selection directly determines the evaluation result. It should reflect three aspects: the time value of funds, the impact of inflation, and various risks that can be borne (such as financial risks, bankruptcy risks, etc.).
(5) Determination of remaining economic life
Economic life refers to the number of years from the valuation base date to the asset’s loss of profitability.
Generally speaking, the life of goodwill should be the same as the duration of the enterprise, so the economic life is generally not specifically determined but regarded as indefinite. Of course, due to changes in market competition and conditions, a certain trademark or a certain enterprise's goodwill depreciates, and the economic life of the goodwill will be shorter than the legal, contractual life or legal operating period. Therefore, maintaining the economic life of goodwill requires continuous capital investment.
3. Residual value method
(1) Residual value method and calculation
The residual value method is also called the cut difference method. Generally applicable to the evaluation of goodwill, that is, first evaluate the overall asset value of the enterprise, and deduct the value of all tangible assets and identifiable intangible assets of the enterprise, which is the value of goodwill. In essence, this method also uses the income method. principle. The cornerstone of the residual value method valuation theory comes from the 'total valuation account theory'. The two viewpoints it based on in its early days, whether it is "the whole is greater than the sum of its components" or "unaccounted assets", are both to varying degrees. Some characteristics of goodwill are revealed from different angles. However, in actual operation, its various flaws and irrationality are revealed. From the perspective of the total valuation account, the calculation formula for a company's goodwill value is as follows:
P=W-Z
In the formula: P-the assessed value of goodwill;
W-The overall asset appraisal value of the enterprise;
Z-The value of all tangible assets and identifiable intangible assets of the enterprise.
For trademarks, this approach can also be adopted, that is, the value of a trademark is equal to the value of the overall assets of the enterprise minus the value of all the tangible assets of the enterprise and other identifiable intangible assets.
Here, there are three different types of expected income: total profit, net profit and net cash flow. Their financial connotations, calculation calibers and calculation formulas are all significantly different, so they will not be used for the same company in the same year. is the same value, and the method of estimating expected returns and discount rate is similar to the excess return method. When selecting the corresponding discount rate, attention should be paid to the consistency with the calculation caliber. When the expected return is the company's net profit, the discount rate should be a combination interest rate (i.e., safe interest rate + risk interest rate); when net cash flow is used as the expected return to estimate the overall value of the company, the industry benchmark rate of return should be selected as the discount rate ; When estimating the overall value of the enterprise based on (total profit + interest payment), the return on total assets rate should be selected as the discount rate.
There is another way to use the residual value method, which is to first estimate the total income of the enterprise, and then separately estimate the value of various tangible assets and other identifiable intangible assets and their corresponding yields, and then subtract the total income from the total income of the enterprise. By removing the income from these assets, we obtain the income from goodwill, and by converting it into principal, we obtain the value of the goodwill.
(2) Applicability analysis of the residual value method
The formula of the residual value method is a summary of the traditional recognition method of goodwill. Although it can calculate the value of goodwill, the resulting goodwill It does not truly represent the value of goodwill.
(1) The purchase cost in the residual value method formula is caused by negotiations between the buyer and the seller. It reflects the judgment of different interested parties on the price of the enterprise, which is not only determined by the intrinsic value of the enterprise, but also Affected by the negotiation conditions and negotiation skills of buyers and sellers. If the buyer and seller negotiate under unequal conditions, then the goodwill calculated back from the purchase price must contain non-goodwill factors. For example, in the market merger transaction negotiations of United Corporation (UAL), from August 1989 to 1993, its acquisition price rose from US$3.7 billion to US$6.7 billion, and then fell to US$5.1 billion. During this period, the acquisition price There have been no significant changes in the company's tangible assets, indicating that goodwill calculated in this way is unreliable.
(2) The problem of intangible assets valuation can be clearly identified. According to the author's investigation of listed companies, some clearly identifiable intangible assets have not been recorded in accounts, and almost all listed companies have not recorded trademark rights, patent rights, etc. In the joint-stock reform or asset reorganization of listed companies, only the land use rights of intangible assets are evaluated and recorded. With the development of the economy, intangible assets have become more and more important in business operations, and quantitative research on intangible assets has also received attention. In this way, intangible assets have been widely decomposed according to various classifications. Information provided by the American accounting company Yongan classified intangible assets into sixteen categories.
Professional books on intangible asset evaluation in my country in recent years have also made detailed classifications of intangible assets and established a strict and scientific evaluation system for each type of intangible assets. That is to say, with the development of intangible assets evaluation technology and As the decomposability of intangible assets increases, the value of goodwill becomes higher and higher.
(3) The value of each part of the assets in the residual value method formula is obtained through evaluation methods of different natures. The overall value of the enterprise is evaluated using the present value method of expected earnings, and the value of tangible or intangible assets is evaluated using the cost method or the market method. The selection of evaluation standards is different between them, and the goodwill calculated based on this is not quite the same. Therefore, the above residual value method formula cannot correctly evaluate goodwill.