Company Valuation Under IFRS : Interpreting and Forecasting ...

Chapter Five – Valuing a company
1.3 Amortisation of intangible assets
The accounting treatment of goodwill is discussed in Chapter seven. Acquisition
of new goodwill will have to await Chapter seven, and discussion of mergers and
acquisitions. For the time being, we are merely concerned with building
intangible assets into our accounting forecasts of a going concern. It follows that
there can be no acquisition of new goodwill in the model. We either amortise
what is in the balance sheet or we do not. As discussed in Chapter four, under
IFRS rules there is no amortisation of goodwill after 2004. Notice that
historically amortised goodwill will not be added back into balance sheets, so the
figure that will continue to be carried is the partly amortised amount.
Other intangible assets may be capitalised for one of two reasons. They may be
created as part of the writing up and down to fair value of assets assumed as part
of an acquisition. In this case, they may be amortised over their useful lives, or
may be deemed to not to have a determinable life and be carried unamortised.
Alternatively, the company may capitalise some of its expenditure on the creation
of patents or brands, in which case they will both be amortised and added to by
future investments, and will be systematically retired.
Intangible assets of the second kind should be modelled in exactly the same
fashion as tangible assets, with amortisation run off gross fixed assets and an
asset life. And it is reasonable to assume retirements in the same way as we did
for tangible fixed assets.
1.4 Changes in working capital
It is most convenient to separate operational from financial items when
modelling companies. We shall therefore treat working capital as comprising
inventory, trade debtors (trade receivables) and other non-cash current assets,
minus trade creditors (trade payables) and other non-cash current liabilities. Cash
and short term debt will be modelled separately as part of financing (though in
Metro’s case the balance sheet shows total debt and we have left this
unallocated). This should not be taken to imply, however, that all cash should
automatically be netted off against debt when valuing the equity in a company.
That would be fine if it were really practical to run a company with no cash
whatsoever in its balance sheet, clearly an impossibility. So, when we model the
company’s finances, we shall take minimum operating cash requirements into
account. But we shall treat them as part of the cash and debt calculation, and keep
them separate from non-cash items.
Working capital used to be referred to by classical economists as ‘circulating
capital’, and this is a useful way to conceptualise it. At any one time our company
will have a given stock of goods on its shelves. It will owe its suppliers for that
which has been delivered to it during the credit period under which it buys, and
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