The fair value assessment of digital platforms

IFRS 13 provides three approaches to measure the fair value of an asset: market approach, cost approach, and income approach. The market approach assumes that the value of an intangible asset can be estimated directly from the market. The comparable transactions approach is the most important method used to value intangibles under the market approach. The cost approach involves determining the replacement cost of the asset, while the income approach uses discounted cash flow, income criteria, and option pricing to determine the asset's value. To be classified as an intangible asset, the asset must comply with the provisions of the Conceptual Framework for Financial Reporting 2018 and IAS 38. The Market Approach is a valuation method that requires observable fundamentals in the market where the transaction takes place and for the asset being valued. However, there are few observable market prices for intangible assets, making it difficult to apply this approach. In cases where intangible assets are granted or obtained separately or with other assets, market-derived data can be used to estimate the value of the intangible asset. However, the market approach is generally not usable for intangibles, particularly trademarks. The cost approach to asset valuation is based on the principle of economic substitution, which states that no rational operator would pay more for an asset than the cost of developing it from scratch. However, this approach is typically past-oriented and not future-oriented, which can result in a value that does not reflect the current market value. Additionally, not all costs incurred in the past may have been spent effectively or efficiently, and some research projects may fail to create an asset. Despite these limitations, the cost approach can provide meaningful information as part of an evaluation process. Techniques under this approach include replacement cost and reproduction cost. The income approach is used to determine the fair value of an intangible asset based on the present value of expected cash flows or earnings. However, quantifying these flows is often difficult for intangibles. The cash flows associated with the asset reflect the expectations of the market participants without considering entity-specific synergies. In the case of digital platforms, the value allocated may overlap with the brand/internet domain it responds to. For example, a platform used in e-commerce may correspond to a contributory intangible to the brand/internet domain, which is often the strategic intangible.