IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

Wiley IFRS: Practical Implementation Guide and Workbook

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May 31, 20X6, there was $1.5 million and $2.5 million of pass-through business included in the financial statements. Machines are normally returned repaired within a month of receipt. (f) The net realizable value of the inventory excluding pass-through business at May 31, 20X6, was $9 million, and trade receivables are expected to realize their full amount. The price/earnings ratio of quoted entities in the same industrial sector as Van Products is approximately 8. Assume there would be no effects of a change to IFRS other than those just set out and that the book values of assets and liabilities reflect their fair values unless otherwise stated. Any taxation effects can be ignored. Required Advise the company' s directors on the value of their shares, setting out the impact that a move to IFRS may have on the share valuation. Solution In valuing the shares of Van Product s, two main methods could be used: (a) Assets basis (b) Price/earnings ratio basis The assets basis would normally measure the maximum amount that a purchaser would pay for the shares. A major element of the business's value will be goodwill. A move to IFRS should not really af– fect this basis of valuation, as a purchaser would not normally use carrying value as a basis for pricing the shares. In valuing the net assets, all the items have been valued at their fair value or recoverable amount. Including goodwill and intangibles, the value of the shares is placed at $72 million. On a price/earnings ratio basis, it may be best to use an average of the last two years' earnings, as there is an element of fluctuation in the profit levels. IFRS will affect this valuation, as the basis of computing profits after tax will be different from GAAP. Thus the average of the last two years' profits is ($15.25 million + $10.75 million) / 2, or $13 million. The PIE ratio of a similar quoted company is 8; thus a lower ratio would be applicable to the company, say 6. The value of the shares would be 6 x $13 million, or $78 million. When compared to the purchase price on an assets basis ($72 million), there is not a sig– nificant difference. Therefore, this calculation would give the parameters for any negotiations with po– tential purchasers. If GAAP were used to value the shares on a PIE ratio basis, the value would be 10 + 8/ 2, or $9 million x 6, or $54 million, which is significantly different from the preceding calcula– tions. Assets Valuation May 3l, 20X6 $m Adjustment $m Value ..1!!L Property, plant, and equipment: Increa se in value of land Plant and machinery omitted (Workings [1]*) Forests (Workings [3]) 45

2 2.5 .-2 9.5

45

54.5 9 8 4 __ill.> 57.5 12 ...l.2 ....11

Inventory Trade receivables Cash Tota l liabilities Value of tangible net assets Intangible assets Goodwill (Workings [I ]) Intangible assets (Wor kings [2]) Value of total assets

PricelEarnings Ratio Valuation

20X6 M!. 8 4 ill 11 3 (0.75) (I ) I (L5.) ( 10.75)

20X5 M!. 10 12 &5.) 11.5 2 (0 .75)

Profit after tax Amortization of goodwill (Wo rkings [I ]) Depreci ation of plant and equipment Intangibles: development costs (Wo rkings [2]) Amo rtization Impairment (Workings [2]) Biological assets Pass-through bu siness (Workings [4]) Revised profit afte r tax