April 2014
Intermediate to advanced
1344 pages
44h 24m
English
book
Cost of Capital: Applications and Examples, + Website, 5th Edition
by Shannon P. Pratt, Roger J. Grabowski, Richard Brealey
Content preview from Cost of Capital: Applications and Examples, + Website, 5th Edition
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CHAPTER 30
Cost of Capital for Fair Value Reporting of Intangible Assets1
Gary Roland and Glen Kernick
Net Working Capital and Fixed Assets
Identifiable Intangible Assets
Unidentifiable Intangible Assets (i.e., Goodwill)
Intangible Asset Income Approach
Multiperiod Excess Earnings Method
Differentiating Risks among Assets
Implied Rate of Return—Unidentifiable Intangible Assets
Rate of Return-based Reconciliation
INTRODUCTION
The emphasis on fair value in financial reporting with the goals of improving transparency and providing useful information to investors has solidified the need for supportable and defensible estimates of the cost of capital used in the measurement of assets and liabilities for financial reporting. Although this applies to all types of assets and liabilities, the focus of this chapter is on the development of the cost of capital for intangible assets.
The general lack of observable market data related to rates of return for individual tangible or intangible assets of a business enterprise creates challenges in the development of a supportable cost of capital. As cost of capital relates to tangible assets (net working capital and fixed assets), there are many cases in which discount ...
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