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 !