Unit One:

Introduction to Financial Modeling

What is a financial model?

Financial Modeling
A Financial Model is the process of
is a representing in
representation in numbers of a
numbers of some company's
or all aspects of a operations in the
company's past, present, and
operations. the forecasted
future.
Uses of Financial Models
Financial models are used to estimate the value of a
business, viability of projects, sensitivity analysis,
Cash Flow Analysis, Financial Statement
preparation.

Financial Models are decision making tools

Financial modeling is the process of creating a

summary of a company's expenses and earnings in
the form of a spreadsheet that can be used to
calculate the impact of a future event or decision.
Financial Model:
A Lens to View Business st
ca
ore
n t s: F
m e
tat e
ci al S
an
Fin

Financial Model

Fin
anc
i al S
t ate
m ent
s: F
o rec
ast
Example of a Financial Model

Assumption: Sales
activities continue
as previous
Design a Sales Inputs:
Growth Model Y1: Sales
Units=200,000
Y2: Sales
Units=250,000
 Sales Growth Model
Sales Growth
Description Y1 Y2 Rate
Sales Units 200,000 250,000 25%
The financial modeler creates:
• One cell for Description , cell A1
• One cell for the prior year's sales, cell B2, and
• One cell for the current year's sales, cell C2.
• The fourth cell, cell D2, is used for a formula that divides
the difference between cell B2 and C2 by cell B2.
• This is the growth formula.
• Cell D2, the formula, is hard-coded into the model. Cells B2
and C2 are input cells that can be changed by the user.
 Financial Model
• A financial model is a
tool used to forecast
a business’s
financial
performance into the
future based on
historical data and
assumptions.
Why do we build financial models?
• For anyone pursuing a career in
– Finance and investment
– corporate development,
– investment banking,
– FP&A,
– equity research,
– commercial banking, or other areas of corporate finance,
building financial models is part of the daily routine.
Investment
Corporate Corporate
Project Decisions
Decisions Transactions
Finance Valuation,
Company Mergers &
Whether to Equity
Performance, Acquisitions,
invest in a Research,
Strategic Capital
project Portfolio
Planning Raising Management
 Types of Financial Models
1. Financial Statement Models
2. DCF Model
3. Merger Model
4. Initial Public Offering (IPO) Model
5. Leveraged Buyout (LBO) Model
6. Sum-of-the Parts Model
7. Consolidation Model
8. Budget Model
9. Forecasting Model
10. Option Pricing Model
Hierarchy of Financial Modeling
Financial Modeling Best
Practices
Key Structure for Model Building
• Good Models clearly separate inputs, processing and
outputs.

Inputs Processing
Outputs

Clearly Transparent
identified Broken
Should only down in to
ever be simple steps
Quickly
entered once Easy to Accessible
follow
 Modelling Best Practices

What are modeling best practices

1. Clarify
2. Simplify
3. Plan
4. Integrity
5. Model Testing
Modelling Best Practices
• What problem is the model meant to
solve?
• Who is the end user?
1. Clarify
• What are users supposed to do with
the model?

2. Simplify • What is the minimum number of inputs

and outputs to build a useful model?
Modelling Best Practices

• Plan how inputs and outputs will be

laid out
3. Plan
• Keep all inputs in one place

• Consider using Excel tools such as:

4. Integrity “Data validation” and “Conditional
formatting”
Modelling Best Practices

• Use test data to ensure the model

5. Model Testing works as expected
Tension: Complex Vs. Simple
Models
Financial Model Elements

Inputs

Processes Outputs
 Model Inputs

Achieving objectives
Objectives
• Enter each data once
• Accurate • Use color to
• Reasonable data differentiate
ranges
inputs and outputs
• Easy to use
• Easy to understand • Use data validation &
• Easy to update data conditional formatting
• Use comments
 Model Processing

Achieving objectives
• Break down complex
Objectives calculations
• Easy to maintain • Use comments and
• Accurate processing annotations
• Transparency • Use formatting
• Calculate final figures
which will go onto the
output reports
 Model Outputs

Achieving objectives
Objectives • Make outputs
• Provide key results modular
to aid decision-making • Consider creating a
• Easy to understand summary section with
• Unambiguous only the most
important key model
outputs
 Unit Two:
Excel Fundamentals: Formulas for
Models in Finance
 Keyboard over the mouse
• Professionals use the keyboard over the
mouse to
– Save time
– Move around more easily
• Professional trainings unplug your mouse
(Challenge yourself to unplug or not use
key board)
• Slower in short run; much faster in long
run.
Excel Layout Workbook

corporatefinanceinstitute.com
 Unit Three:
Financial Statement Modeling
Financial Statement Forecasting
Framework
Financial Statement Forecasting
Framework
 Financial Modeling Steps
Historical Data

Assumptions and Drivers

Forecast revenues down to EBITDA

Forecast Working capital

Forecast Capital Assets (PP&E, Capex, depreciation)

Forecast Capital Structure

Complete Cash Flow Statement

Financial Modeling Steps
Model Set-up and Assumptions
The Case
Historical Data

DATA
Assumptions, Drivers and
Forecasting Methods

Assumptions and Drivers

Forecasting Methods
Forecasting Operating Revenues
and Profits
Forecasting Revenues
Forecasting Gross Margin and
SG&A Expenses
Forecasting Gross Margin and
SG&A Expenses
Forecasting Gross Margin and
SG&A Expenses
Modelling EBITDA

Modeling EBIT
Modelling Balance Sheet (Working
Capital)

Having forecast the

revenues and costs of
an operation, the next
step is to consider the
working capital
required to generate
them.
Forecasting Working Capital
Forecasting Working Capital
Forecasting Working Capital
Forecasting Working Capital
Forecasting Working Capital
 Forecast Balance Sheet (PP&E,
Capex, Depreciation, Amortization)

Forecast non-current
capital assets :
• PP&E
• Capex
• Depreciation
• Intangibles
Forecasting Non-Current Assets
Forecasting Non-Current Assets
First principles approach
• Forecast property, plant, and
equipment requirement directly “Quick and simple” approach
(e.g. store expansion) • Forecast depreciation &
• Forecast amortization as a percentage of
depreciation/amortization based on opening PP&E balance or
stated depreciation/amortization percentage of revenue • Forecast
policies. If deprecation policies are PP&E balance based on a capital
not available, divide gross assets asset turnover ratio
by the depreciation expense to get
average asset life.
Forecasting Non-Current Assets
Forecast Capital Structure
The financing
structure affects both
the balance sheet and
the income statement
(i.e. interest)
Forecast Capital Structure
Forecast Capital Structure
Approaches to modeling capital
structure (debt/equity)

Debt & Equity Debt/Equity X

Values Held Ratio Held
Constant Constant

Debt/Equity
Change Over
time based on
cash flow
Approaches to modeling capital
structure (debt/equity)
Approaches to modeling capital
structure (debt/equity)
Forecasting Cash Flows

A cash flow
forecast can be
derived from the
balance sheet and
income statement
Forecasting Cash Flows
Forecasting Cash Flows: Operating
Forecasting Cash Flows: Investing
Forecasting Cash Flows: Financing
Auditing Techniques
Auditing techniques
 Unit Four:
Valuation Fundamentals
 IFRS 13

FAIR VALUE MEASUREMENT

78
 Learning Objectives

At the completion of studying this chapter, you will be able to:

lUnderstand conceptual underpinnings for fair value measurement
lUnderstand how fair value is measured for:

ü non-financial assets

ü financial assets

ü financial liabilities

lUnderstand the judgments in measuring the fair value of an item

lidentify the disclosure requirements of IFRS 13

ldistinguish between fair value measurement under US GAAP and IFRS

79
List of Applicable IFRS

Topic List Standards

Financial Instruments IFRS 9
Property, Plant and Equipment IAS 16
Investment Property IAS 40
Intangible Assets IAS 38
Agriculture IAS 41
Business combination IFRS 3

80
The objective of IFRS 13

81
The objective of IFRS 13

IFRS 13 establishes how to measure fair value. It does not prescribe:

l what should be measured at fair value;
l when to measure fair value (i.e. the measurement date); or

l how (or whether) to account for any subsequent changes in fair value (e.g. in
profit or loss or in other comprehensive income).

Apply IFRS 13:

l When another IFRS requires or permits fair value measurements or disclosures
about fair value measurements

82
 THE SCOPE OF IFRS 13
Excluded from the scope •IFRS 2 (Share based payment)
•IFRS 16(leases)
• IAS 2 (net realisable value)
• IAS 36 (value in use)

Disclosures in IFRS 13 not required for • Plan assets (IAS 19)

• Retirement benefit plan investments
(IAS 26)
• Assets for which recoverable amount is fair
value less cost of disposal (IAS 36)

84
85
Who would transact for the item?

l Market participants are buyers and sellers in the principal (or most advantageous)
market who are:

Independent Knowledgeable

Able to enter into a Willing to enter into a

transaction transaction

l Market participants act in their economic best interest

ü Maximise the value of the asset
ü Minimise the value of the liability 86
Fair value: market participant perspective
application guidance: how to measure fair value

l To measure fair value determine:

ü all characteristics of the asset or liability being measured (exclude things that are
not characteristics of the asset or liability);
ü for non-financial assets, the valuation premise and the highest and best use;
ü the principal (or most advantageous) market;

87
Fair value: market participants’ view point
application guidance: characteristic of an asset or liability
l Fair value measurement is for a particular asset or liability
ü it captures all characteristics of the asset or liability being measured that market
participants would take into account when pricing the item
– Location
– age and remaining economic life
– Condition
– restrictions on use or sale that are a characteristic of the item
l it excludes things that are not characteristics of the asset or liability

ü transactions costs
ü restrictions on use or sale that are not a characteristic of the item

88
 Restrictions on use, sale or transfer of
assets Example

Would the following restrictions impact fair value?

Impacts fair
Scenario
value
1. entity holds an equity instrument (financial asset) for which sale is legally restricted for a
Yes
specified period and restriction is embedded in the terms of the instrument

2. entity holds an equity instrument (financial asset) and has agreed with another entity not
No
to sell for at least 12 months

3. charity holds land donated for use only as a playground but which could be sold to raise
No
funds and the restriction would not transfer to the buyer

4. entity holds a piece of land that is subject to an enduring legal right of the utility company
Yes
to run power cables across the land
 Where would the transaction taken place?

Fair value is the price in the …

Or, if no principal market, the
Principal market
most advantageous market
The market with the greatest volume and The market that maximises the amount
level of activity for the asset or liability that would be received to sell the asset and
minimize the amount that would be paid to
transfer the liabilityafter considering
transaction costs and transport
costs.

90
Fair value: which market?
Determining the principal market

l The following three markets exist for EEP’s fleet of vehicles. The corporation has the
ability to transact in all three markets (and has historically done so). As at the
measurement date, the corporation has 100 vehicles (same make, model and
mileage) that it needs to measure at fair value. Volumes and prices in the respective
markets are as follows:

Market price The corporation's volume for Total market-based

the asset in the market volume for the
(based on history asset
and/or intent)
A 490,000 60% 15%
B 500,000 25% 75%
C 550,000 15% 10%

Which of the market is the principal market for the corporation's Vehicle?
IFRS 13 Fair Value Measurement
Transaction and transport costs

include in
cost type description explanation
cost to sell the fair value
asset/transfer the no, but consider characteristic of
liability that are in assessment of the transaction,
transaction cost directly attributable to which market is not of the
the disposal or most asset/liability
transfer and would advantageous
not otherwise have
been
cost thatincurred
would be
incurred to transport
yes, if location characteristic of
transport cost an asset from its is a characteristic the asset
current location to its of the asset
exit market
Fair value: which market?
test your understanding: transaction costs
Example: EEP has an asset that is sold in two different markets, Market A and
Market B, with similar volumes of activities, but with different prices. EEP enters into
transactions in both markets and can access the price in those markets for the asset
at the measurement date. There is no principal market for the asset. Information
from both markets is presented as follows.
Market A Market B
Price Br. 30 Br.28
Transport costs (5) (4)
Br. 25 Br.24
Transaction costs (3) (1)
Net amount received Br. 22 Br.23
l How should EEP measure the fair value of the asset? Or how much is the fair value of
the asset?

93
IFRS 13 Fair Value Measurement
Example

Price less
Transport
Market Price transport Transaction costs Net
costs
costs
A 27 3 24 3 21

B 25 2 23 1 22

Scenario Fair value

market A is the principal market 24
market B is the principal market 23
neither market is the principal market 23
 IFRS 13 Fair Value Measurement
Example

Market 1 2
Daily trade volume 100,000 20,000
Price 100 108
Price less transport costs 95 101
Transaction costs 4 4
Net 91 97

Entity A has an access to the two markets.

Entity A sells in Market 2.
Which Market will determine the fair value in accordance with IFRS 13?
 IFRS 13 Fair Value Measurement
The unit of account
When measuring fair value under IFRS 13, the item to be measured is based on
the unit of account specified by the IFRS or IAS that requires/permits fair value
e.g. a:
• stand-alone asset or liability (e.g. financial asset or liability)
• group of assets or liabilities (e.g. cash generating unit)
• group of assets and liabilities (e.g. business)

The unit of account is the level at which an asset or a liability is aggregated

or disaggregated in an IFRS for recognition purposes.
How do we arrive at a market-based measurement?
Is there a quoted price in an active market for an identical asset or liability?

Yes No
Replicate a market price through a valuation
Use this quoted price to measure fair
technique* (using observable+ and unobservable
value (Level 1) inputs: Levels 2 and 3)

Must use without adjustment No significant unobservable

Use of significant
unobservable
(Level 3) inputs‡ =
(Level 3) inputs‡ =
* Valuation techniques include the market Level 2 measurement
Level 3 measurement
approach, income approach and cost
approach.
+ Maximise the use of relevant observable inputs and minimise the use of unobservable inputs. Observable
inputs include market data (prices and other information that is publicly available).
‡ Unobservable inputs include the entity’s own data (budgets,
98
forecasts), which must be adjusted if market
participants would use different assumptions.
 Fair value hierarchy

IFRS 13 establishes a three level fair value hierarchy for inputs to measure fair value:

unadjusted quoted prices in active markets

for identical assets or liabilities
Level 1
inputs other than quoted prices
included in Level 1 that are
observable, either directly or
indirectly
Level 2 inputs
unobservable
Level 3
 Fair value hierarchy
Example

• Entity A measures the fair value of its investment property using the price per square metre
derived from market transactions for similar buildings in similar locations. The assets in the
observed transactions are sufficiently comparable so that no significant adjustments to
the inputs are required
• Entity B measures the fair value of its investment property using the price per square metre
derived from market transactions for similar buildings. The assets and the location in the
observed transactions are not sufficiently comparable so a significant adjustments to the
inputs are required.

What is the fair value hierarchy for both entities?

 Valuation techniques

•When a price for an identical asset or liability is not observable, an entity measures fair value
using another valuation technique that:
•maximises the use of relevant observable inputs and
•minimises the use of unobservable inputs

•Appropriate in the circumstances

•For which sufficient data are available to measure fair value

•IFRS 13 provides guidance on the use of valuation techniques when measuring fair value and
states that there are three widely used valuation techniques:
l the market approach
l the cost approach
l the income approach

•An entity should use valuation techniques consistent with one or more of those approaches to
measure fair value.
Fair value: non-financial asset

102
 Highest and best use
•The fair value of non financial asset should reflect the highest and
best use from market participant perspective.
ü HBU: the use of a non-financial asset by market participants that
maximises the value of the asset:
– physically possible
– legally permissible
– financially feasible
is presumed to be the market or
other factors suggest otherwise

103
 Valuation premise
l A non-financial asset either:
ü provides maximum value through its use in combination with other assets and
liabilities as a group.
– is its value influenced by it being ‘operated’ with other assets?

– an example: equipment used in production facility

– market participants are assumed to hold complementary assets
ü provides maximum value through its use on a stand-alone basis
– is its value independent of its use with other assets?

– an example: a vehicle or an investment property

l Does not apply to financial instruments or liabilities

104
Valuation premise continued

l Example: a manufacturer has unique work in progress inventory which market

participants would convert into finished goods. To measure the fair value of the
unique work in progress the manufacturer assumes that market participants have
the machinery necessary to convert the unique work in progress inventory into
finished goods
ü this assumption applies even when the necessary equipment is bespoke and
unique to the entity holding the inventory

105
Example : highest and best use
Land acquired in a business combination is currently developed for industrial use as a
site for a manufacturing facility. Nearby sites were recently developed for residential
high-rise flats. It was determined that the land could be used to develop residential
high-rise flats.
How is highest and best used determined?

l In this case, the highest and best use is determined from the higher of:
a) The value of the land used in the manufacturing operation

b) The value of the land as a vacant site for residential use

l Note that transformation costs (e.g., costs to demolish the manufacturing facility)
would be considered in the value of land as a vacant site.
 Fair value of a non-financial asset
test your understanding: example 2
l Your factory is built on Plot 900 in a recently developed industrial development zone
on the outskirts of Addis Ababa where the land that is divided into one hundred two
acre plots that before their further development were essentially homogenous.
Factories, like yours, are the highest and best use for the land rights.
l On 31 December 2000 two of the plots adjoining your plot were sold (ie sale of the
land rights and the buildings, if any, constructed thereon):
ü Plot 901 sold for Br. 30 million: land rights with a similar factory of the same age,
same condition and same floor area as yours.
ü Plot 899 sold for Br. 10 million because it is undeveloped (yet to be built on).

108
 Fair value of a non-financial asset
test your understanding: example 2
On 31 December 2000 what is the fair value of your land rights (ie excluding the factory
building)?
l Choose 1 of:

1) Br. 0; 2) Br. 10 million; 3) Br. 20 million; 4) Br. 30 million; 5) Br. 70 million; 6) Br. 80
million; 7) Br. 100; million; or 8) another amount
On 31 December 2000 what is the fair value of your factory building (ie excluding the land
rights)?
l Choose 1 of:

1) Br. 0; 2) Br. 10 million; 3) Br. 20 million; 4) Br. 30 million; 5) Br. 70 million; 6) Br. 80
million; 7) Br. 100; million; or 8) another amount

109
 Fair value of a non-financial asset
test your understanding: example 3
l The facts are the same as Example 1, except that in this example (fifteen years later),
on 31 December 2015:
ü high-rise commercial development is now the highest and best use for your land
rights because the rapidly expanding financial district of Addis Ababa has grown to
the boundary of plots 899, 900 and 901.
ü Consequently, on 31 December 2015 Plots 899 and 901 each sold for Br. 100
million.

110
 Fair value of a non-financial asset
test your understanding: example 3
On 31 December 2015 what is the fair value of your land rights (ie excluding the factory
building)?
l Choose 1 of:
1) Br. 0; 2) Br. 10 million; 3) Br. 20 million; 4) Br. 30 million; 5) Br. 70 million; 6) Br. 80
million; 7) Br.100; million; or 8) another amount
On 31 December 2015 what is the fair value of your factory building (ie excluding the land
rights)?
l Choose 1 of:
1) Br. 0; 2) Br. 10 million; 3) Br. 20 million; 4) Br. 30 million; 5) Br. 70 million; 6) Br. 80
million; 7) Br.100; million; or 8) another amount
Does your estimate of the fair value of your factory building (ie excluding the land rights)
depend on which model you use for your land rights (cost model or revaluation model)?

111
 Fair value of a non-financial asset
what do you think? example 4
l In Examples 1 and 2 fair value was determined with reference to the sale of similar
assets at the measurement date (31 December 2000 and 2015).
l The facts are the same as in Example 2, except that there have been no recent sales
of similar assets (ie Plots 899 and 901 are unsold).
l How could the fair value of the factory building on Plot 900 be measured at 31
December 2015?
l What judgements would be made in measuring such a Level 3 fair value?
l Can such a Level 3 fair value measurement be faithfully represented?
l Is such a Level 3 fair value measure verifiable?

112
Fair value: restriction on use
test your understanding

Example: A donor of land specifies that the land must be used by the corporation for
cultivation of sugar cane. Upon review of relevant documentation, the corporation
determines that the donor’s restriction would not transfer to market participants if the
corporation sold the asset (i.e. the restriction on the use of the land is specific to the
association). Furthermore, the corporation is not restricted from selling the land.
Without the restriction on the use of the land, the land could be used as a site for
coffee plantation. In addition, the land is subject to an easement (a legal right that
enables a utility to run power lines across the land).
l Under these circumstances, what is the effect of the restriction and the easement on
the fair value measurement of the land?

113
 Fair value: restriction on use
test your understanding
l You own land use rights to Plot A that is zoned ‘green belt’—which prohibits the
construction of buildings on that land.
l Similar neighbouring plots’ with the same land use rights and subject to the same
restrictions sold recently:
ü for Br. 950,000 on 30 October 2015 (Plot B); and
ü for Br. 30,000,000 on 31 December 2015 (Plot C).
l The difference in the selling price of Plots B and C is attributable primarily to the press
leaked confidential government dossier setting out the government’s plans for proposing
an amendment to the law to allow for the construction of high-rise buildings on some
(but unspecified which) green belt land.

114
Fair value: restriction on use
test your understanding

You employ a reputable property valuation expert to value the land use rights to Plot A
at 31 December 2015 under each of the following hypothetical scenarios:
l Scenario 1: the land is rezoned allowing for the construction of a high-rise
building: Br. 100,000,000
l Scenario 2: market participants believe there is no prospect of the zoning laws
changing: Br. 1,000,000
What is the fair value of the land use rights to Plot A at 31 December 2015? Choose
one of:
1) Br. 950,000; 2) Br. 1,000,000; 3) Br. 30,000,000; 4) Br. 100,000,000; or 5) another
amount.

115
Fair value: location
test your understanding
On Sene 1, 2008 your firm buys a machinery for ¥ 90 million in china to increase its
productivity. Additionally the firm paid ¥ 10 million agent commission and ¥ 5 million
to transport the machine from China to its production site. The seller of the machine
incurred ¥ 6million selling costs. Assuming that the market at which the firm
purchased the machine is its principal market (should the firm choose to sell the
machine).
What is the fair value of the machine at Sene 30, 2008 (in ¥)?
Choose one:
A. 75 million
B. 80 million

C. 85 million
D. 74 million
E. 69 million

116
Fair value: financial asset

117
 Specific requirements for financial instruments
l The ‘highest and best use’ concept does not apply to financial instruments
l The unit of account for financial instruments in the scope of IAS 39 and IFRS 9 is
typically the individual financial instrument
ü an exception, if certain conditions are met, IFRS 13 permits an entity to measure
the fair value of a group of financial assets and financial liabilities with offsetting
risk positions on the basis of its net exposure (the portfolio measurement
exception) (see paragraphs 48 and 49 of IFRS 13).
l Specific guidance for financial liabilities with demand features – the fair value of such
liabilities cannot be less than the amount payable on demand, discounted from the
first date that the amount could be required to be paid (see paragraph 47 of IFRS 13).

118
Measuring fair values of financial instruments
l Generally measure fair value using:
ü market approach (for example, quoted market prices and market multiples for
comparable assets); and/or
ü income approach (for example, present value techniques and option-pricing models)

ü Generally do not use the cost approach

l Considerations that affect the fair value of financial instruments include:
ü the time value of money
ü non-performance / credit risk

ü liquidity risk
l Effect of risk: (i) variable expectations of future cash flows, (ii) price for bearing this
uncertainty (see paragraphs B15 to B17 of IFRS 13)

119
Fair value: liabilities

120
Fair value: a liability
the concept
l The fair value of a liability is
ü the price that would be paid to transfer a liability (exit price)
ü in an orderly transaction (not a forced sale)

ü between market participants (market-based view)

ü at the measurement date (current price). (IFRS 13 Appendix A)
l Market participant perspective: consequently, the entity’s intention to settle or
otherwise fulfil a liability is not relevant when measuring fair value.
l The market value of a liability is:
ü the amount for which the liability could be settled between knowledgeable,
willing parties in an arm’s length transaction
ü (IFRS for SMEs and IPSASB’s Conceptual Framework)

121
 Fair value: liability decision tree
application guidance: liabilities
Is there an observable market price No
Yes to transfer the instrument?
Does somebody hold the
Fair value = corresponding asset?
observable market Yes
price of instrument No

Fair value = fair value of the Fair value = another

corresponding asset valuation technique

Is there an observable market

Level 2 or 3
Yes price for the instrument No

Fair value = traded as an asset?

Fair value = another
observable market valuation technique
price of asset

122
Disclosure

IFRS 13 requires extensive disclosure of sufficient information to asses:

ü Valuation techniques and inputs used to develop fair value measurement for both
recurring and nonrecurring measurements;
ü The effect of measurements on profit or loss or other comprehensive income for
recurring fair value measurements using significant Level 3 inputs.
l Recurring fair value measurements are those presented in the statement of financial
position at the end of each reporting period (for example, financial instruments).
l Nonrecurring fair value measurements are those presented in the statement of
financial position in particular circumstances (for example, an asset held for sale in line
with IFRS 5).
.

123
Disclosure
As the disclosures are really extensive, here, the examples of
the minimum requirements are listed:
l Fair value measurement at the end of the reporting period;
l The reasons for measurement (for nonrecurring)
l The level in which they are categorized in the fair value hierarchy,
l Description of valuation techniques and inputs used;
l And many others

124
IFRS and
Valuation
Brief introduction of the IVS
 Presentation Outline

01
International
02
Market
03
Income
04
Cost
Valuation of Approach Approach Approach
Standards
(IVS)
Value

V
…an Estimate or Opinion of Value of some object or thing….
 Value, Price and Cost
Value is the“…..most probable selling price, worth, usefulness, or utility of a property for some purpose.

Value Price Cost

Opinion Fact Fact

Formal Vs. Informal Valuation Pa
ge
5

129
IVS Glossary

Framework

Asset Standards

General
Standards
International
Valuation
Company Name
Standards
IVS General Standards

There are 5 General Standards. These are

1. IVS 101 Scope of Work,
2. IVS 102 Investigations and Compliance,
3. IVS 103 Reporting,
4. IVS 104 Bases of Value and
5. IVS 105 Valuation Approaches and Methods
IVS Asset Standards

l There are 8 Asset Standards. These are

1. IVS 200 Business and Business Interests,

2. IVS 210 Intangible Assets,

3. IVS 220 Non-Financial Liabilities,
4. IVS 230 Inventory,
5. IVS 300 Plant and Equipment,

6. IVS 400 Real Property Interests,

7. IVS 410 Development Property and
8. IVS 500 Financial Instruments.
 Valuation Approaches
Marketing is the study and management of exchange relationships. Marketing is the business process of creating relationships with and satisfying customers.

01
Cost Approach

Depreciated Replacement
Cost.

02
Income Approach

Direct Capitalization
Method.

03
Market Approach

Sales Comparison Method

Cost Approach Steps
l Step 1: Reproduction Cost New
Less Functional Obsolescence
Equals Replacement Cost New
l Step 2: Replacement Cost New (RCN)
Physical Deterioration
Equals RCN Less Physical Deterioration (RCNLPD)
l Step 3: RCNLPD
Less Economic Obsolescence
Equals Depreciated Replacement Cost (taking into account all Forms
of Depreciation).
Equals Depreciated Replacement Cost (including land value)

134
 Cost Approach Example
l A valuer has found the construction cost for three
homes which have developed recently. The homes
are similar in all features except for those as
indicatedSubject
in the below table. Comparable Comparable
Comparable
property sale #3
sale #1 sale #2
Square-meter 150 140 150 165
home/built up area
No of bed rooms 3 3 4 4
No. of bathrooms 2 2½ 2½ 2
No of kitchens 1 2 2 1
Construction Cost 1,500,000 Birr 1,650,000 Birr 1,930,000

135
 Comparative (Area/Volume)Method
l The valuer estimates the following costs:
• Cost of a ½ bathroom to be Birr 45,000.
• The cost of one bed room to be Birr 50,000.
• The cost of one kitchen to be Birr 40,000
l Required
l Estimate the Replacement cost new of the Building

136
 Valuation Approaches
Marketing is the study and management of exchange relationships. Marketing is the business process of creating relationships with and satisfying customers.

01
Cost Approach

Depreciated Replacement
Cost.

02
Income Approach

Direct Capitalization
Method.

03
Market Approach

Sales Comparison Method

 Income Capitalization

Process of converting future

income into a value.

Income
Approach
Example

l ABC have an excavator which can be rented

for Br. 410.96. There is a collection loss of
19.47 days. The annual fuel, lubricant and
operator expenses is ETB 45,000. The
required rate of return is 8%.
l Compute the value of the excavator using the
income approach

139
 Solution
l

140
 Valuation Approaches
Marketing is the study and management of exchange relationships. Marketing is the business process of creating relationships with and satisfying customers.

01
Cost Approach

Depreciated Replacement
Cost.

02
Income Approach

Direct Capitalization
Method.

03
Market Approach

Sales Comparison Method

Market
Approach
Sales Comparison Method
 Market Approach Example
You are required to value a house Built in
3,000m2 before 15 Years based on the
following sales comparison data.
Value Factor Sale 1 Sale 2 Sale 3

Price 27,000,000 28,000,000 25,600,000

Size (sq.ft.) 2,500 2,700 2,500

Age (years) 20 20 30
 Unit 5
Valuation Modeling
 Learning Objectives
• Upon successful completion of this course, students will be able to:
• Understand the difference between equity and enterprise value
and when to use each of them
• Understand what discounted cash flow analysis is, how to
calculate free cash flow, WACC and NPV
• Understand why comparable company analysis is performed,
the pros & cons of it, and how to calculate the various ratios
• Understand various factors impacting valuation that cannot be
discretely modeled
• Understand why precedent transaction analysis is performed,
the pros & cons of it, and how to calculate the various ratios
• understand how to effectively present the results of valuation
analysis