APB working draft on customer-related assets released for comments

The Appraisal Practices Board (APB) of The Appraisal Foundation has released the working draft of “Valuation of Customer-Related Assets.” Comments are due by July 31, 2012. Any questions on the draft should be addressed to Paula Douglas Seidel.

The working group on customer-related assets concluded that the valuation of customer-related assets is a complicated exercise that requires significant judgment. This paper presents concepts on how to approach and apply the valuation process appropriate for customer-related assets.

In an upcoming study on benchmarking remaining useful lives of intangibles identified in business combinations, BVR found customer relationships to be an oft-used category with widely disparate interpretations. Analysts performing purchase price allocations are advised to read the APB document carefully and are encouraged to comment on any section. Here are some of the discussion points wherein the working group directly solicits comments:

A. Asset identification: Are there circumstances where the customer contracts and related renewals should be recognized and measured as two separate assets?

B. Subsequent events: Should the assessment of economic lives of customer relationships include consideration of post-acquisition efforts and their effect on customer buying patterns or should very low projected attrition imply very long customer lives in all cases? In other words, should the valuation specialist consider factors other than observed or projected attrition when determining customer lives?

C. Economic life: Should migration churn be included in customer attrition calculations?

D.  With-and-without method: What is the most appropriate discount rate for the without scenario:

• A higher discount rate than in the with scenario?
• The same discount rate as used in the with scenario?
• A lower discount rate than used in the with scenario?
• If a different discount rate is used in the with scenario and the without scenario, what discount rate should be used in the weighted average return on assets calculation in a business combination?

E.  Cost approach:

• Should the cost approach be tax-affected or not?
• Under what circumstances should the cost approach be employed to value customer-related assets?

F.   Deferred revenue: Many valuation specialists believe it may be appropriate to adjust income-based customer relationship valuation approaches for deferred revenue considerations. Two questions should be asked related to this topic:

• Should an income-based customer relationship model be adjusted if a company has a deferred revenue liability on the balance sheet?
• If you believe there should be an adjustment, how should this adjustment be made?