From July 1, 2024, how is excess earnings method applied in valuation of intangible assets in Vietnam?
From July 1, 2024, how is excess earnings method applied in valuation of intangible assets in Vietnam?
Pursuant to Clause 2, Article 14, Vietnam Valuation Standards on Valuation of intangible assets issued together with Circular 37/2024/TT-BTC, the excess earnings method is implemented as follows:
- Step 1: Identify the expected revenue streams generated from the use of the intangible asset to be appraised;
- Step 2: Determine the net income stream after deducting material and labor costs, depreciation (if any), selling and administrative expenses, other costs, and corporate taxes (if any);
- Step 3: Determine the contribution of the assets contributing to the income related to the use of the intangible asset to be appraised.
Reasonable income for contributing assets is calculated through the following specific steps:
(i) Identify the assets (including but not limited to working capital) contributing to the income related to the use of the intangible asset to be appraised (contributing assets);
(ii) Estimate the market value of the assets contributing to the business income. This market value may be determined based on revaluation of the residual value according to the accounting books and benchmarking with market information. In case of limited information, adjustments may be considered based on the book value;
(iii) Determine the net income of the contributing assets based on a reasonable profit margin and the value of the contributing assets, specifically by multiplying the value of each contributing asset by the reasonable profit margin of that asset.
- Step 4: Determine the net income generated from the intangible asset to be appraised by excluding the net income stream allocated to other assets (including the contribution of the contributing assets calculated in Step 3 and the anticipated cost of acquiring new fixed assets during the forecast cash flow period), while adding the depreciation of the contributing assets as fixed assets to obtain the net cash flow generated from the intangible asset to be appraised;
- Step 5: Determine the value of the intangible asset to be appraised by using an appropriate discount rate to bring to the present the net income generated from the intangible asset to be appraised (calculated in Step 4).
The excess earnings method for intangible assets in Vietnam is implemented through the 05 steps mentioned above.
From July 1, 2024, how is excess earnings method applied in valuation of intangible assets in Vietnam? (Internet image)
Currently, what are cases of applying excess earnings method in valuation of intangible assets in Vietnam?
According to Subsection 11.6, Section 11, Valuation Standard No. 13 on Valuation of intangible assets issued together with Circular 06/2014/TT-BTC, the income approach is regulated as follows:
STANDARD CONTENT
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11. Income Approach
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11.6. excess earnings method
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c) Applicable Cases:
- When valuation of intangible assets combined with other assets in an asset group to generate cash flow, where the intangible asset has a major impact on the income stream, and the contribution of other assets is minor.
- Can be used as a supplementary method for other valuation methods.
According to the above regulation in Vietnam, the excess earnings method is applied in valuation of intangible assets in the following cases:
- When valuation of intangible assets combined with other assets in an asset group to generate cash flow, where the intangible asset has a major impact on the income stream, and the contribution of other assets is minor.
- Can be used as a supplementary method for other valuation methods.
What information is required to apply the excess earnings method in Vietnam?
Pursuant to Article 15, Vietnam Valuation Standards on Valuation of intangible assets issued together with Circular 37/2024/TT-BTC, the information required when applying the excess earnings method in Vietnam includes:
Required Information to Apply the excess earnings method
The following information should be considered when applying the excess earnings method:
1. The cash flow generated by the enterprise from the intangible asset to be appraised, including income and expenses associated with the intangible asset to be appraised.
2. The cost of using auxiliary assets necessary and associated with the effective use of the intangible asset to be appraised.
3. An appropriate discount rate to convert the present value of the intangible asset to be appraised.
4. Associated costs or benefits, such as taxes applicable to the use of the intangible asset to be appraised.
Thus, 04 pieces of information are required to apply the excess earnings method.
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