How do you value order backlog as an intangible asset?

Full Explanation

Order backlog represents confirmed customer orders or signed contracts that have not yet been fulfilled at the acquisition date. Under IFRS 3, order backlog is a contractual intangible asset that must be separately identified and valued. The income approach is standard: the valuer projects the revenue from the existing backlog, deducts the direct costs of fulfilment (materials, labour, overhead), deducts contributory asset charges for the supporting assets used to fulfil the orders, applies the appropriate tax rate, and discounts the after-tax cash flows at a rate reflecting the risk of the backlog. Because order backlog has a short and defined life (orders are typically fulfilled within weeks or months), the discount rate is relatively low and the present value calculation is straightforward. The key judgements involve: the probability of order cancellation (some orders may be cancelled before fulfilment), the margin on backlog orders (which may differ from steady-state margins), and the completeness of the backlog data provided by the target. Order backlog values tend to be modest relative to other intangibles in a PPA, but they can be material for companies with long-cycle manufacturing, defence contractors, or construction businesses where backlog extends over months or years. The asset is amortised over the fulfilment period, typically producing a large amortisation charge in the first year post-acquisition.

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