Background
A leading operator in the life sciences industry engaged us to value their intangible assets, including customer relationships, non-compete contracts, and complex financial instruments such as convertible notes and share warrants. The goal was to ensure accurate representation of these assets and instruments on the company’s balance sheet, in compliance with applicable standards and valuation practices.

Phase 1: Identification of Intangibles

• Assessment of Documents: A detailed review was conducted on the company’s balance sheet, customer contracts, and non-compete agreements.
• Clause-by-Clause Analysis: Contracts were scrutinized to verify the existence and scope of intangible assets, identifying key economic benefits and associated rights.
• Data Collection: Information on historical revenue, customer attrition rates, and contract terms was gathered to serve as input for valuation models.

Methodology for Valuation of Intangibles

1. Customer Relationships: Valued using the Multi-Period Excess Earnings Method (MPEEM) to isolate cash flows attributable to customer relationships.
2. Non-Compete Agreements: Valued by quantifying the potential loss to the company if these agreements were absent, adjusting for enforceability and expected economic benefits.

Phase 2: Analysis of Financial Instruments

• Review of Contracts: Convertible notes and share warrants were examined to determine their features, such as conversion terms, embedded derivatives, and maturity profiles.
• Separation of Components: Using relevant Ind AS standards (e.g., Ind AS 109), the equity and debt components were unbundled to derive their individual fair values.

Methodology for Financial Instruments

1. Debt Component: Discounted cash flow analysis was used to calculate the present value of expected payments.
2. Equity Component: Option pricing models like the Black-Scholes Model were applied to estimate the value of embedded options.

Standards Compliance

• Valuation adhered to ICAI Valuation Standards (2018), particularly:
  • IVS 103: Covering valuation approaches and methods​.
  • Ind AS 113: For fair value measurement, ensuring alignment with international accounting practices​​.
• The process included extensive documentation to ensure transparency and support audit requirements.

Outcome
The valuation ensured:

1. Accurate representation of intangible assets and financial instruments in the balance sheet.
2. Compliance with Indian Accounting Standards and ICAI valuation guidelines.
3. Enhanced credibility of the financial statements for stakeholders, including investors and regulators.

Challenges and Insights

• Challenges: Ensuring reliability of data in areas with limited historical precedents (e.g., valuation of new customer relationships).
• Insights: The integration of contract analysis with advanced financial modeling provides a robust framework for valuation of complex and intangible assets.

This case demonstrates the critical role of a structured and compliant valuation approach in supporting strategic financial decisions for companies in dynamic industries like life sciences.