IAS 36 Impairment of Assets is not a new standard, and while many of its requirements are familiar, an impairment review of assets (either tangible or intangible) is frequently challenging to apply in practice. This is because IAS 36’s guidance is detailed, prescriptive and complex in some areas.

The Insights into IAS 36 series have been written to assist preparers of financial statements and those charged with the governance of reporting entities to understand the requirements set out in IAS 36, and revisit some areas where confusion has been seen in practice.

The next three publications in the Insights into IAS 36 series cover Step 4 of the impairment review, namely estimating the recoverable amount:

• Estimating recoverable amount;
• Value in use: estimating future cash inflows and outflows;
• Value in use: applying the appropriate discount rate.

The first publication covers the definitions of recoverable amount and fair value less costs of disposal (FVLCOD) and provides an overview of value in use (VIU). The second and third publications discuss estimating future cash inflows and outflows and an appropriate discount rate in VIU calculations.

The publications mentioned above follow this IFRS Adviser Alert.

Updated on February 19, 2024

A business valuation is a complex process with several fundamental elements to consider in determining the right market price.

To achieve their goals, entrepreneurs need to make strategic decisions about their business. These decisions often involve determining the organization’s fair market value. To do this, it is necessary to:

• determine the appropriate valuation report;
• select a valuation approach and method;
• take the entity’s risk factors into consideration.

Determining the appropriate valuation report

The fair value of a business is determined by professionals known as Chartered Business Valuators, or CBVs. The value conclusions provided by a CBV are established in three different types of reports, depending on the level of assurance the client wants. The types of reports are as follows.

Calculation valuation report

A calculation valuation report contains a conclusion as to the value of shares, assets or an interest in a business that is based on minimal review and analysis of the information received. This type of report can be based on several assumptions provided by your organization’s management. It is the least expensive and detailed of the reports. It also offers the lowest form of assurance regarding the value conclusion. This is the type of report most often used by clients for tax planning purposes or for smaller transactions.

Valuation report on an estimate of value

A valuation report on an estimate of value contains a fair value conclusion based on a more in-depth analysis and corroboration of the information received than the calculation report. This report contains more detailed information about your business such as an analysis of its historical results, a description of its customers, suppliers, human resources, competitors, and a summary review of the industry and economic context. Because of the greater depth of analysis and corroboration, this report offers a higher level of assurance than the calculation report.

Comprehensive valuation report

A comprehensive valuation report contains a fair value conclusion based on an extensive or comprehensive review and analysis of the business, its industry and all other important components to determine its value. This information is substantiated appropriately and is set out in a very detailed valuation report. This type of report is often produced in the context of litigation or more complex and significant transactions. It provides the highest level of assurance of the report types.

Selecting a valuation approach and method

Considerable information needs to be obtained and analyzed to produce a comprehensive valuation report. Among others, the valuator needs to:

• Obtain sufficient knowledge of the business’s operations and inherent risk factors;
• Obtain detailed financial information;
• Analyze the balance sheet and capital structure;
• Analyze historical results and make adjustments to reflect any item that is not representative of the entity’s future earnings;
• Analyze the business’s financial forecasts.

The valuation approach and techniques will be determined depending on the type of business and the information obtained and analyzed.

Asset-based approach

The asset-based approach is generally employed in the following circumstances:

• Potential buyers would mainly be interested in tangible assets because of the company’s makeup (a real-estate company or a holding company, for example);
• The company is planning on liquidating its assets because it is no longer viable as a going concern or its profits do not provide a sufficient return on investment.

Income-based approach

The income-based approach is generally used when:

• The company is realizing sufficient return on investment;
• A potential buyer would be interested in projected future profits and cash flow.

The income-based approach assumes that the organization will continue to operate and report profits and increase either profitability or cash flow over time.

There are several recognized methods for determining the value of your business based on such an approach, including the capitalization of earnings method, capitalization of cash flows method, discounted cash flow method, and variations such as the capitalization of earnings before interest, taxes, depreciation and amortization method (EBITDA).

Market-based approach

In addition to the valuation approaches and methods presented above, determining the fair market value of a company involves a review of comparable transactions and an analysis of companies in the industry. This approach provides various financial ratios that can be applied to your business. These ratios should be applied carefully as comparable organizations may differ considerably when it comes to company size, their target market, product range, financial capabilities and growth potential, etc.

Taking the entity’s risk factors into consideration

Critical to determining the fair market value of your business is the identification of various risk factors. These risks have a direct impact on the business’s value, either upwards or downwards. Here are a few examples of various external and internal risks:

External factors

• The economy;
• Financial markets;
• Regulations;
• Competitors;
• Customers;
• New technologies;
• Availability of resources;
• Etc.

Internal factors

• Workforce qualifications;
• Management team’s experience;
• Presence of successors within the organization;
• Level of recurring revenues;
• Level of dependence on certain customers;
• Financial situation;
• Sales staff’s performance;
• Installations’ quality;
• Products and services life cycle;
• Etc.

As mentioned, valuing your business is a complex exercise where a wide range of variables must be taken into consideration and, above all, appropriately addressed.

Don’t hesitate to ask for help from a business valuation expert who will guide you through the process and help you make informed decisions.

Updated on January 20, 2023

In the current environment of rapid transformation and uncertainty, how do you stay agile and anticipate the changes needed to secure your organization’s long-term viability? Strategic planning can help you achieve this.

Today more than ever, organizations rely on strategic planning to stay the course as they navigate change and uncertainty. Factors like labour shortages, inflation and the threat of a possible recession, supply difficulties, digital transformation and climate change are leading to major shifts. These factors are reshaping your organization’s internal and external environment, often in significant ways, requiring you to review your business model.

How can strategic planning help you?
How to approach strategic planning?
Five tools to make strategic planning a success

How can strategic planning help you?

Strategic planning helps you determine the direction where you want to take your business and what you need to do in order to get there. It defines your vision and values, your priorities and goals, and the concrete actions that will help you achieve your goals. A good strategic plan provides members of the organization with clear guidelines, specific objectives and performance indicators to monitor results.

Traditionally, strategic planning covers a period of three to five years, with an annual review. But in a world that is constantly changing, that’s not enough anymore. Businesses can’t afford to ignore change or wait it out to see what happens. They need to move into dynamic mode and to adapt on the go. Organizations that fail to respond fast enough risk seeing a decline in their performance.

How to approach strategic planning?

The solution is to combine strategy with flexibility. You will be able to address immediate concerns while staying aligned with major long-term objectives.

This approach allows you to adjust plans and reorder priorities in response to changes and disruptions. It continually links strategy to execution and generates useful data that can help you make decisions, like the best way to reallocate resources, optimize recruitment or increase sales.

As a result, management and employees are empowered to take intelligent risks, seize opportunities, respond to threats quickly, adopt new technologies and implement new ideas while understanding the impact of their decisions on the business as a whole.

Five tools to make strategic planning a success

1. Prepare a strategic diagnosis for your business

A 360-degree diagnosis of your business will help you analyze the resources, skills and environment at your organization and guide you in the right direction.

2. Establish a planning oversight committee

This committee will be responsible for monitoring strategic planning through indicators, evaluating the results and adjusting the action plan when necessary.

3. Get your organization thinking more cohesively

Dynamic planning forces different departments and teams to break from tradition by leaving their silos behind and function in a more informed and coordinated way.

4. Use a dashboard

Visual tools and dashboards allow you to keep the entire business informed of performance levels and the progress made toward your goals.

In the current environment, businesses need to plan for flexibility so they can continually adapt to evolving needs without losing sight of their objectives and original mission.

5. Communicate clearly with your employees

When strategic planning is approached in a more dynamic mode, things evolve, priorities are reorganised. This can be frustrating for your employees if your business is not communicating with them clearly. Help your team understand the reasons and the advantages behind the new approaches, and plan follow-up meetings.

Our experienced team can help you get moving in the right direction by making adjustments to your plans and actions. Contact us for personalized assistance.