Excess earnings method

The excess earnings method (méthode des surprofits) values a business or intangible asset by capitalising or discounting the earnings it generates in excess of the fair return on all contributing assets. It is based on the principle that value is created by earnings above what a normal, competitive return on assets would generate. In intangible asset valuation — particularly for customer relationships and assembled workforce in PPA — the multi-period excess earnings method (MPEEM) is the standard approach recommended by the IVSC.

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Example: in a PPA following the acquisition of a Swiss wealth management firm for CHF 18.0 million, the MPEEM is applied to the client relationship intangible. After attributing fair returns to all contributing assets (workforce, brand, working capital), the annual excess earnings attributable solely to client relationships amount to CHF 900,000. Discounted at a risk-adjusted rate of 12% over an 8-year estimated useful life, the client relationship value is CHF 4.7 million — separately recognised in the IFRS 3 PPA.

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Hectelion applies the multi-period excess earnings method to identify and value intangible assets in PPA engagements for IFRS 3 compliance.