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DIGIT(AL)IZATION, CHALLENGES AND OPPORTUNITIES IN VALUATION FOR FINANCIAL REPORTING
ADRIAN POPA BOCHIS
COO, DARIAN DRS
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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BLOCKCHAIN ??
• Cryptocurrencies : asset ? Currency ? Commodity ? Collectible?
• Altcoins vs tokens
• Equation of exchange
• Platforms
• Utility tokens, currency tokens, security tokens
• Smart contracts and ICO projects
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BLOCKCHAIN ??
Source : Larry Cao : Blockchain Technology: What Will Be Its Biggest Bang? | CFA
Institute Enterprising Investor
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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
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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
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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
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THANK YOU !