Valuation and Accounting Issues in Desklib: An Analysis

This article analyzes the valuation and accounting issues in Desklib, covering topics such as current and prospective owner valuation, ASPE based on purchase price agreement, rewards program, long-term debt, and debt guarantee. It also discusses the impact of recognition and measurement of liabilities and assets on the purchase price. The article concludes that the overall computation of purchase price is not appropriate as contingent asset and liability are not considered.

Intermediate Accounting II case
Users
DNS – Current owners – valuation
On the basis of equity section of balance sheet annexed to the report, the current owners valuation
before considering contingent claims of/ against the company has been presented here-in-under:
DNS- Current Owner Valuation
Sl no Particulars Amount
1 Capital Stock 50000
2 Retained Earnings 170790
3 Owner valuation 220790
Further, preference shares of $ 5000 has been removed from capital stock
DNS – prospective owners – valuation
The current owner valuation has been computed on the basis of due diligence conducted and
considering the fair value of asset wherever provided. On the basis of the same , the calculation has
been presented here-in-under:
DNS- Prospective Owner Valuation
Sl no Particulars Amount
1 Current Assets 310245
2 Capital Assets 485000
3 Total 795245
4 Debt -250000
5 Interest on debt -65619
6 Current Liabilities -290230
7 Preferred shares -6000
8 Liability for Guarantee -5000
9 Liability for wrongful employee dismissal -30000
10 Claim for infringement of trademark logo 25000
11 Net Asset 179396
CRA for tax determination purpose
In term of Canadian Revenue Agency, the assets must be valued at fair value and there is no official
requirement for a valuation to be done by a CBV in terms of IC 89-3. Further, the act requires the
following:
(a) Asset and liability shall be valued at FMV;
(b) Relevant factors pertaining to entity shall be taken into consideration;
(c) Valuation approach shall be justified;
(d) Valuation multiple shall be justified;
(e) Reasonable Objectivity and judgement shall be used.

ASPE based on purchase price agreement
In terms of Section 1582, Accounting Standard for Private Enterprises Business combination, the
following fact shall be considered:
(a) Whether the said transaction is a business combination: In the present circumstance, acquirer
obtains controls of the entity, hence it is a business combination;
(b) Whether the acquisition is for business or some asset: In the present circumstance, entire business;
(c) Impact on reporting entity financial statement;
(d) Recognition of Goodwill or Gain on Bargain purchase;
(e) Accounting for contingent payment.
The main uses will focus on the purchase price calculation
One of the focus shall be in the disclosure in the financial statement regarding the valuation of fair
assets of the company. Further, the note shall contain disclosure regarding the goodwill or bargain on
purchase in terms of Canadian Company law. Further, the same shall adequately represent whether
the purchase is fair. In the present case, since the business shall be purchased at net value, there shall
be no requirement for goodwill or bargain purchase.
Understand that financial statements must present fairly the results of operations
In terms of Accounting Standards, financial statements shall be prepared in a manner that shall
disclose the true results and allocations, it shall present a true picture and prepared on the basis of
accounting conventions.
Rewards Program – Free Bottled Water
Issue: Recognition and measurement of a liability
In terms of ASPE liability shall mean an obligations which an entity shall bear on account of past
transactions or events and the settlement of same may result in the transfer or use of assets, provision
of services or other yielding of economic benefits in the future. The term provision is not defined
under the act.
Further, under the ASPE, a contingent loss is recognised only when there is likely flow of resources
and not probable.
The liability shall be measured by the amount of outflow of resources.
Implication: recognition will negatively impact the purchase price
When liability is recognised and purchase is made at net asset value, the same shall result in decrease
of net asset and thus, the purchase price shall fall.
Recognition Alternative 1 – Expense approach with calculations
The computation of liability under expense approach:
Number of Bottles claimed; 4556 bottles
Cost of those bottles: 4556*.75= $ 3417
Recognition Alternative 2 – Revenue approach with calculations
The computation of liability under Revenue approach:

Number of Bottles sold: 105455bottles
Number of bottles that can be claimed: 105455*10%= 10546
Cost of those bottles: 10546*$0.75= $7909.5
Recommendation: Provides a conclusion that is consistent with ASPE
Since in the present circumstance, alternative 1 represent only the redemption that has been made in
the present year and does not present a true picture as the liability may arise in future. Further, in
terms of ASPE liability shall encompass obligations which an entity shall bear on account of past
transactions and shall result in outflow of resources. Hence, alternative 2 is best suited.
Contingent Loss
Issue: Recognition and measurement of a liability
Under the ASPE, a contingent loss is recognised only when there is likely out flow of resources to
settle any obligation and not probable.
Further, under IFRS, it is probable that there will be an outflow of resource, a provision is recognised
and if it is not probable then contingent liability is recognised.
The amount must be reasonably estimated and shall represent information that provides a range of the
amount of loss. If the same appears in the range then it is a better estimate of it.
Implication: recognition will negatively impact the purchase price
When contingent liability is recognised and purchase is made at net asset value, the same shall result
in decrease of net asset and thus, the purchase price shall fall.
Measurement Alternative 1 – Probability weighted approach (IFRS)
The computation of liability based on probability has been done here-in-below:
Contingencies
Former employee dismissal
Amount of Liability which is unlikely: $40000
Chance of paying $20000= 50%
Chance of Paying $10000= 50%
Liability to be created: ($20000 *50%+ $10000*50%) = $15000
Measurement Alternative 2 – Range based approach (ASPE)
Under ASPE, no liability shall be recognised as the same is probable and not likely. If the
computation is made based on range method, the same shall be as follows:
Contingencies
The loss that can occur is $ 20000 and minimum that can occur is zero
$0-$20,000
Recommendation: Provides a conclusion that is consistent with ASPE

Under ASPE, no liability shall be recognised as the same is probable and not likely. However, under
business combination the acquirer recognizes a contingent liability assumed in a business combination
at the acquisition date if it is a present obligation arising from past events and its fair value can be
measured. Since the same does not entail any present obligation and outflow no valuation shall be
required.
Contingent Gain
Issue: Recognition of an asset
In term of ASPE, contingent assets are not recognised until they are realised. However, under IFRS,,
they are recognised if it is virtually certain that they will be recognised.
Implication: recognition will positively impact the purchase price
When contingent asset is recognised and purchase is made at net asset value, the same shall result in
increase of net asset and thus, the purchase price shall increase.
Recognition Alternative 1 – Accrue the gain.
Purchase price shall be increased by $25000 as it is likely that company shall be rewarded for the
claim of infringement of trademark logo.
Recognition Alternative 2 – Do not accrue the gain
Under this Scenario, the acquisition shall not represent a true figure and shall be undermined by
$25000. Thus, the acquirer shall be benefitted.
Recommendation: Provides a conclusion that is consistent with ASPE
In term of ASPE, contingent assets are not recognised until they are realised. Hence no recognition.
Long-term Debt
Issue: measurement of the long-term debt
Under IFRS Long term debt is measured based on fair market value which is similar under ASPE.
Implication: measurement in accordance with ASPE will impact the purchase price
If debt is measured at Fair value, the value of debt shall be $250,000 and the accrued interest on the
same shall stand at $65,619. Thus the aforesaid amount shall reduce the value of net asset. Further, it
is assumed that there is interest on interest. Thus, under fair valuation the purchase price shall be
reduced by $ 65,619.
Analysis
Notes that there are no alternatives
Since under IFRS and ASPE similar treatment is meted out, hence no alternative available.
Calculates the current fair value of the debt
The fair value of debt shall be as follows
Value of debt: $250000.
Value of Interest = $ 250000*1.06^4- $250000 = $ 65619.
Fair value = $ 250000+ $60000= $ 310000

Provides a loan amortization schedule
Since there is no loan repayment before the end of the tenure, there cannot be any amortisation
schedule. If there is payment, then amortisation schedule shall be as follows:
Sl No Particulars Opening Balance Interest Payment Closing Balance
1 Debt 315619.24 18937.15 64185.16 270371.2344
2 Debt 270371.2344 16222.27 64185.16 222408.3485
3 Debt 222408.3485 13344.5 64185.16 171567.6894
4 Debt 171567.6894 10294.06 64185.16 117676.5907
5 Debt 117676.5907 7060.595 64185.16 60552.02618
6 Debt 60552.02618 3633.122 64185.16 0
Debt Guarantee
Issue: Recognition and measurement of loan guarantee liability
In terms of ASPE liability shall mean an obligations which an entity shall bear on account of past
transactions or events and the settlement of same may result in the transfer or use of assets, provision
of services or other yielding of economic benefits in the future. The term provision is not defined
under the act.
Further, under the ASPE, a contingent loss is recognised only when there is likely flow of resources
and not probable.
Under IFRS, liabilities is recognised on the basis of probable outflow
Implication: recognition will negatively impact the purchase price
When liability is recognised and purchase is made at net asset value, the same shall result in decrease
of net asset and thus, the purchase price shall fall.
Alternative 1 – Do not accrue as supported by case facts
If the liability does not accrue and there is no likeliness of the same, the same shall not be recognised
in terms of ASPE. Thus, no recognition required.
Alternative 2 – Accrue as supported by case facts
If the liability accrue as per facts, then liability needs to be recognised. In the present case $5,000.
Recommendation: consistent with the case facts and analysis
Under ASPE, no liability shall be recognised as the same is probable and not likely. However, under
business combination the acquirer recognizes a contingent liability assumed in a business combination
at the acquisition date if it is a present obligation arising from past events and its fair value can be
measured. Since the same does not entail any present obligation and outflow no valuation shall be
required.

Debt to Equity Ratio Calculation
Quant. Analysis: Revises the equity amount based on revisions from the individual issues
DNS- Prospective Owner Valuation
Sl no Particulars Amount
1 Current Assets 310245
2 Capital Assets 485000
3 Total 795245
4 Debt -250000
5 Interest on debt -65619.2
6 Current Liabilities -290230
7 Net Asset 189395.8
Quant. Analysis: Makes a reasonable attempt at calculating the purchase price
DNS- Prospective Owner Valuation
Sl no Particulars Amount
1 Current Assets 310245
2 Capital Assets 485000
3 Total 795245
4 Debt -250000
5 Interest on debt -65619.2
6 Current Liabilities -290230
7 Preferred shares -6000
8 Value of Equity 183395.8
Qual. Analysis: Identifies various important factors that are not captured by the PP Agreement
Capital asset value
The value is captured at $ 485000 which represent the fair value of asset. It does not capture the
following aspect:
(a) The above valuation may be biased;
(b) It does not present the actual transaction value rather is based on similar transaction estimate;
(c) Asset condition has not been taken into consideration;
(d) Qualitative factors.
Preferred shares
The value is captured at $ 6000 which represent the fair value o. It does not capture the following
aspect:
(a) Fair value of preference dividend to be payable in future;
(b) Fair value of preference shares at present post discounting;
(c) Management control;
Contingent gain

The value is captured at Nil. It does not capture the following aspect:
(a) Probability of not receiving the same.
(b) Probability of receiving the same.
Contingent loss
The value is captured at Nil. It does not capture the following aspect:
(a) Probability of 100% payment;
(b) Probability of no payment
(c) Probability of 10% liability.
Provides an overall conclusion on the purchase price
The overall computation of Purchase price is not appropriate as contingent asset and liability are not
considered. Further, the same shall be included based on IFRS.