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Wiley IFRS: Practical Implementation Guide and Workbook
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])
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
45
45
2
2.5
.-2
9.5
54.5
9
8
4
__ill.>
57.5
12
...l.2
....11
PricelEarnings Ratio Valuation
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
20X5
M!.
10
12
&5.)
11.5
2
(0 .75)
20X6
M!.
8
4
ill
11
3
(0.75)
(I )
I
(L5.)
( 10.75)