On June 15, 2016, the Appraisal Practice Board (“APB”) of the Appraisal Foundation released the final version of the Valuation for Financial Reporting Advisory #2, The Valuation of Customer-Related Assets. The non-authoritative best practices guidance elaborates on valuation approaches and methodologies that can be used to measure fair value of customer-related intangible assets such as customer lists, order or production backlogs, and contractual and/or non-contractual customer relationships.
Firms devote significant human and financial resources in developing, maintaining and upgrading customer relationships. In some instances, supply or customer contracts can give rise to identifiable intangible assets. The following situations can require firms to value such customer-related assets for financial reporting purposes:
- Business combinations
- Asset acquisitions
- Impairment tests for goodwill and/or long-lived assets
Over the past few years, some of the financial reporting requirements regarding customer-related assets have evolved and bifurcated depending on whether a firm is public or private. The APB best practices guidance includes a summary of the applicable accounting standards pursuant to both U.S. GAAP and IFRS. As outlined in APB VFR Valuation Advisory #2, US GAAP and IFRS accounting requirements for customer-related assets have broadly converged over time.
As discussed in the APB best practices guidance, a variety of factors can influence the value of customer-related assets, including industry characteristics, underlying business and product/service characteristics, longevity of the relationship between customers and the firm, and the presence of other assets (tangible or intangible) that contribute to the value of the firm.
We wrote about the valuation of customer-related assets in a prior blog post, which referenced draft versions of the APB best practices guidance.
Mercer Capital values customer-related assets to the satisfaction of clients and their auditors across a multitude of industries. Please contact us to explore how we can help you with purchase price allocations, impairment tests or restructuring advisory.
- Valuation of Customer-Related Assets
- APB VFR Valuation Advisory #2: The Valuation of Customer Related Assets