Tax Amortization Benefit - TAB

The idea is simple:

IFRS requires the purchaser (acquirer) to value all the identifiable Intangible Assets at their fair value - and in the absence of an active market (say, the acquired technology is unique) the way to come up with fair value is to discount the future cash flows generated from the use of an asset in question.

Now, in addition, the valuation is to be performed from an "independent purchaser" perspective - and so all the synergies that could be generated by the purchaser are to be excluded from the valuation model.

However, the "independent purchaser" approach stipulates that the tax benefits realised from using the asset in the future (tax amortisation) are to be included in the valuation...Why? Well, typically, in an asset deal scenario, the purchaser would be allowed the tax amortisation and hence would factor it in the purchase price.

What it means is that, on top of the present value of future inflows, you need to put the present value of tax benefits resulting from the asset amortisation...

An interesting thing to realise is that to solve it in excel requires using "circular references". Why? Well, we want to calculate the present value of tax benefits realised on amortising the "entire" value of an asset - which is made of the "original" value calculated using the DCF model and of the tax benefit itself.

In other words - if the original (net of TAB) value of an asset is 100 and the TAB is calculated at 20 for a given tax amortisation period and applicable tax rate (as well as discount rate), the present value of tax amortisation of an asset worth 120 (100+TAB) equals 20 i.e. the TAB itself...

A detailed walk-through on how to calculate TAB at eHow

Here is a more recent take on TAB