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DIGIT(AL)IZATION, CHALLENGES AND OPPORTUNITIES IN VALUATION FOR FINANCIAL REPORTING
ADRIAN POPA BOCHIS
COO, DARIAN DRS
1. DICTIONARY.COM
Digitization: to convert (data) to digital form for use in a computer1.
Digitalization (medical) : The administration of digitalis by a dosage schedule until sufficient amounts are present in the body to produce the desired therapeutic effects1.
DIGITIZATION DIGITALIZATION
DIGITIZATION. DIGITALIZATION.DIGITAL
TRANSFORMATION
Digitization:
• Transitioning from analog to digital :
• creating a digital (bits and bytes) version of analog/physical things
• use digital data, extracted from physical carriers, to automate business processes and workflows
Digitalization:
• Making digitized information work for you :
• transforming business activities, by using digital technologies and digitized data with a mix of autonomous, semi-autonomous and manual operations
• the road of moving towards digital business and digital transformation, as well as the creation of new – digital – revenue streams and offerings while doing so.
Digital transformation:
• Using digitalization to create new business concepts
• transformation of business activities, processes, competencies and models to leverage the changes and opportunities of digital technologies and their impact across society in a strategic and prioritized way
• a way to move to digital business.
CHALLENGES
New type of assets to be valuated
Tangible or intangible ?
Definition of an intangible asset : conditions for recognition
Valuation approaches and methods
Determining the useful life
VALUATION FOR FINANCIAL REPORTING PURPOSES
Transactions : Third parties or intra-group
• IT companies
• SPV’s –applications, programs, websites
• Blockchain platforms / Cryptocurrencies platforms
Purchase price allocations:
• Tangible assets ( less but easier to value) vs intangible assets ( more but difficult to value)
• Intangible assets - split between:
• Website
• Soft program
• Software License
• Employee related intangibles ?
• Customer contracts or client lists
• Determining useful life
Impairment testing
• Intangible assets with indefinite useful lives
• Investments in associates and Joint ventures
Asset valuation on consolidation
STANDARDS IFRS IFRS 3 BUSINESS COMBINATIONS
IAS 36 IMPAIRMENT OF ASSETS
IAS 38 INTANGIBLE ASSETS
IAS 39 FINANCIAL INSTRUMENTS. RECOGNITION AND MEASUREMENT
IFRS 13 FAIR VALUE MEASUREMENT
SIC-32 INTANGIBLE ASSETES – WEB SITE COSTS
IVS IVS 104 BASES OF VALUE
IVS 105 VALUATION APROACHESAND METHODS
IVS 200 BUSINESS AND BUSINESS INTERESTS
IVS 210 INTANGIBLE ASSETS
IVS 500 FINANCIAL INSTRUMENTS
CHALENGES 1.0 IT COMPANIES
VALUE OF
THE BUSINESS
VALUATION
APPROACHES
• Intragroup transactions – companies that work for internal developing only vs companies that work for third parties ( free market)
• Estimating the business value to reflect the stage of the business on its business life cycle
• Type of services :
• General IT services
• Specific IT services ( 10 – 31 )
• IT product company
• Market / Multiplies
• Income
CHALENGES 2.0 INTANGIBLE ASSETS
• WEBSITES
• APPLICATIONS / SOFT PROGRAMMS
• PLATFORMS FOR BUILDING SOFT PRODUCTS
• CUSTOMER CONTRACTS AND RELATED CUSTOMER RELATIONSHIPS ;(low building costs but “forever” servicing and development costs)
• TRAINNED WORKFORCE
• NAMES AND BRANDS RELATED TO WEBSITES
CHALENGES 3.0 WEBSITES / PLATFOMS
• ONLINE SALES / PURCHASING – FMCG
• BANKING – RETAIL / ONLINE PAYMENTS
• GAMMING
• GAMBLING
• EDUCATIONAL WEBSITES / LIBRARIES
• TRANSACTION PLATFORMS
• FINANCIAL DATA VENDORS
• FINANCIAL DATA LIBRARIES
• TRANSPORT PLATFORMS
CHALENGES 4.0 APPLICATION PROGRAMS
THE SOFTWARE BEHIND THE WEBSITES / ONLINE PLATFORMS / ETC
Understanding of the application
niche / programming
language niche
Implication on development cost
Similarity and comparables
The cost of developing the program vs the
savings of having it ready to use
The premium for growth / scale up
potential
VALUATION APPOACHES
• Businesses, websites / platforms, software
• Finding and selection of the appropriate multiple
• Adjustments
Market approach – comparable transactions method
• Businesses and websites / platforms
• Sustainability of the cash flows
• Forecast period
Income approach
• Software
• Same expertise for developing the product
• Profit margin / profit premium
Cost approach
BLOCKCHAIN ??
• Cryptocurrencies : asset ? Currency ? Commodity ? Collectible?
• Altcoins vs tokens
• Equation of exchange
• Platforms
• Utility tokens, currency tokens, security tokens
• Smart contracts and ICO projects
BLOCKCHAIN ??
Source : Larry Cao : Blockchain Technology: What Will Be Its Biggest Bang? | CFA
Institute Enterprising Investor
Opportunities 1.0
Available and cost-effective data bases;
Capability to transfer data from hard copy to data bases ( OCR )
Regression analysis
Developing apps to solve the valuation cost issue for small
businesses
Developing apps for processing / valuating large assets databases
Big data : predictive models, statistical
algorithms
Artificial Intelligence – apps for standard repetitive operations :
• Cadastrial identification
• Measuring RE
• Computing net replacement costs of buildings / equipments
Using financial data vendors with apps for :
Getting the info -Finding the appropriate comparables :
• Peer groups;
• searching and filtering
• Calculating agjustments
• Calculating multiples
Increasing work speed
Reducing cost Growing the profit
Opportunities 2.0
CONCLUSIONS
Transforming challenges in new /
growing market niches for appraisers / valuers
Using opportunities as tools ; don’t let them transform in a risk for
the profession
THANK YOU !
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