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Brand Valuation &

IFRS 3in

M&A

Dr Sheeba Kapil

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TRANSACTION STRUCTURE•Companies Act,1956•Income Tax Act,1961•Competition Act,2002

CROSS-BORDER TRANSACTIONS•Foreign Exchange Management Act ,1999•FDI policy regulations

LISTED COMPANIES•SEBI Regulations•Stock Exchange – Listing Agreement

Regulatory Due DiligenceRegulatory Due Diligence

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Motives for M&A

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Financial Due Diligence

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Assessing Worth of Target?

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New Age

Firms

Intelligent Firms

Industrial Age

Firms ASSETS

GM

AT&T

COCA COLA

MICROSOFT

PFIZER

GOOGLE, AMAZON

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101010

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• Sintex Industries Ltd. • Its 2005 annual report has a note that states: • "In the year 2000-01, Sintex brand owned by the

company had been valued by Deloitte Haskins & Sells, at a value as at the beginning of that year. The value has been accounted for in the books by debiting the Brand Value shown under the Fixed Assets and by creating Brand Valuation Reserve shown under Reserves and Surplus."

• The amount involved was Rs 165 crore.

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• Emami Ltd stated in its 2005 annual report that intangible assets had been valued as on March 31, 2005 by Ernst & Young at Rs 423 crore. This included Rs 265 crore for brands. "Based on the said valuation, the company's brands were accounted for in the books of accounts in the year 1999-2000. The resulting amount was credited to Revaluation Reserve," states Emami.

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• Kitply's annual report of 2004-2005 spoke of brand valuation done in June 2000 by Ernst & Young. "This has resulted in an increase in the book value of the brand by Rs 127.6 cr which was credited to Revaluation Reserve Account in that year," it states.

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• Ratan Tata, the head of IHCL (the Indian Hotels Company) which owns the Taj group of hotels disclosed that Taj group has brand value of Rs 4000 crore in 2008.

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• Vijay Mallya convinced conservative, SBI to accept the Kingfisher airline brand — registered separately from its beer and wine brands — as collateral to raise Rs 2,000 crore in debt

• LT Foods (earlier called LT Overseas) used its Daawat brand of packaged rice as collateral to raise debt for its $50 Mn (Rs 200 crore) acquisition of US-based rice firm Kusha Inc.

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Valuation methods

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212121MILLWARD BROWN

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IFRS 3-Std on Actg treatment of Goodwill

• Business combinations (except JVs)

• Goodwill• is an asset acquired post acquisition and • is initially measured as the excess of the cost of the

business combination over the acquirer's share of the net fair values of the acquiree's identifiable assets, liabilities and contingent liabilities. [IFRS 3.51]

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• GOODWILL- Not reported as single asset

• GOODWILL has to be allocated to different classes of IA

• BRAND

• OTHERS-patent, copyright, license, franchise etc.

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• IFRS 3 Prohibits amortization of goodwill Instead Goodwill tested for Impairment annually in accordance with IAS 36

• Goodwill recorded at cost less impairment charges

• Report acquired intangibles separately in B/S

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• all identifiable intangible assets (apt from goodwill) are recorded at FV

• Separately identifiable

• Controlled by entity & Future CFs

• Trademarks, internet domain name, brand

• Royalty, franchise

• Patented techno, software

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Impairment

Step 1: Compare FV of asset with its BV

• When FV > BV no impairment

• When FV < BV impairment of goodwill/IA

Step 2: compare implied FV with BV

Allocate the loss to the unit

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Challenges

• Uniform BV method

• Valuing acquired as well as self generated brands

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