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Frequently Asked Questions - Intangible Asset Valuation
What does the Financial Accounting Standards Board say about valuing intangible assets? Cambridge Partners & Associates is most often asked to perform intellectual property appraisals because our clients are seeking to comply with requirements of the Financial Accounting Standards Board (FASB). Each individual Statement of Financial Accounting Standards (SFAS) explains how companies should addresses financial accounting and reporting. For example, FASB 141 addresses accounting for business combinations. FASB 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. FASB 144 addresses accounting for the Impairment or Disposal of Long-Lived Assets. Cambridge Partners takes great care in valuing intangible assets, real estate, machinery & equipment and businesses for FASB reporting and otherwise. Does Cambridge Partners value intangible assets for licensing purposes? Yes, Cambridge Partners values patents, trademarks, tradenames, technology and other intangible assets for licensing purposes. Like our clients, we understand that a well known or designed intangible assets may allow the licensee to increase sales, the price per item sold, and even to lower the risk associated with a new product introduction. Therefore it is common practice for intangible assets to be licensed as the licensee receives a competitive advantage in producing and selling its products. We work with patent attorney’s, tax professionals and our clients to identify the underlying asset value. Can you please explain the market approach to valuation as it relates to valuing a tradename? In the Market Approach, value is inferred from analysis of comparable properties that are for sale in the marketplace. For example, if it is common practice in the industry in which a tradename is used to license the tradename, then licensing agreements in the industry provide a good source of comparable data from which to estimate the market value of the subject tradename. The factor on which we focus is the range of royalty rates and/or profit splitting arrangements on licensed tradenames. From this information, we develop a royalty rate and/or profit split percentage which we apply to the valued tradenames expected future income. Can you please explain the income approach to valuation as it relates to valuing a patent? In utilizing the Income Approach to value, the appraiser generally employs the Royalty Savings formulation or method. This method measures what level of royalties an owner of a patent saves by having ownership versus licensing of the patent from a third party. The appraiser will then determine the excess rate of return related to these patents, which they will apply to the Company's expected revenues that benefit from the patent. The appraiser then discounts the after-tax royalties to present value using a rate of return that reflects the risk of an investment in the patent. What is the proper methodology for determining the fair value of customer relationship intangibles? In many acquisitions, we find that customer relationships are a significant asset that must be quantified in order for the client to comply with FASB 141. The fair value of a customer list is the present value of the after-tax cash flow projected over the remaining useful life of the acquired customer list. As part of the valuation, the remaining useful life of the customer relationship asset must be determined. The determination of remaining useful life is generally computed using customer survival rates developed through a complex lifing analysis. After life is determined, revenues and expenses are then projected over the expected remaining life of the list and discounted to present value. How is a trained and assembled workforce valued? Trained and assembled workforce is generally only appraised for FASB 141 or FASB 142 in order to determine a value for the customer relationship asset. This is because the customer relationship asset is often considered to be a residual asset. In valuing a trained and assembled workforce, i.e. management, salesforce, MIS group, etc. we utilize the cost savings approach. The savings are quantified by giving consideration to employment advertising, agency fees, reimbursed applicant expenses, relocation expenses, corporate employment staff compensation, line management interview time, departmental orientation time and learning curve inefficiencies. Warrant agreements are generally valued using an accepted options pricing model such as the Black-Scholes option pricing model, the Noreen-Wolfson model or the Shelton and Kassouf model. These models determine either the econometric or theoretical value of the instrument - that is, the price at which the warrant should sell in the marketplace. What does the term fair value mean? For financial reporting purposes, all business combinations should be accounted for in the same way that other asset acquisitions are accounted for - based on the values exchanged. The definition of fair value as stated in SFAS No. 141 is: The amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale. Fair value considers synergies and attributes of a specific buyer, not of a hypothetical willing buyer. Therefore, fair value may represent a higher value if specific buyers have anticipated and were willing to pay for the expected synergies. The fair value premise can be applied to valuations of real estate, machinery & equipment, intangible assets and business interests. In performing our appraisals, Cambridge Partners follows generally accepted appraisal standards, as promulgated by the American Society of Appraisers (ASA). How do you determine the value of a Non-Competition Agreement (non- compete agreement)? A covenant not to compete is a valuable asset only if there is a likely probability that a seller would compete against the company being sold (1) in the absence of the non-compete agreement and (2) that such competition would materially affect the company’s future revenues and profitability. In valuing a non-compete agreement the appraiser must first determine the amount of lost revenues that could occur if the seller (in the absence of the non-compete agreement) were to compete with the company. The appraiser must then capitalize lost revenue and earnings utilizing an appropriate discount rate adjusted for among other things, growth in profitability. As a side note, for FASB 141 and FASB 142, the remaining useful life of a non-compete agreement is generally its contractual life. Does Cambridge Partners perform intellectual property appraisals for transfer pricing strategies? Yes. Cambridge Partners performs transfer pricing studies for purposes of international transfer pricing and state and local tax transfer pricing strategies. We understand that in a transaction consummated between parties, the arm’s-length principle is imperative. The arm’s length principal states that such transactions should be carried out under terms and at a price that could have been reasonably expected under similar circumstances (e.g., similar product or service, market, credit terms, reliability and supply, and other pertinent circumstances) if the parties had been dealing at arm’s-length. For cross border and local transactions, we utilize IRC Section 482 as guidance in determining arm’s-length rates. The regulations in IRC Section 482 (§482) provide several basic methods for establishing royalty rates. These methods are the: Comparable Uncontrolled Transactions Method (“CUT Method”); Comparable Profits Method; Profit Split Method; and Other, unspecified methods. How is a bank core deposit intangible asset valued? Core deposits can be valued a number of ways. Generally we will use the cost savings method, an income approach, to value the an acquired core deposit base. This is the approach that was allowed in the Citizens and Southern Bancorporation Tax Court Case and other subsequent cases involving core deposit intangibles. The premise underlying this approach is that a rational buyer would be willing to pay a premium to obtain a group of core deposit accounts only if the accounts are a source of funding that is less expensive than the buyers' marginal cost of funds. What are examples of intangible assets Cambridge Partners & Associates can appraise? Cambridge Partners can assist you with valuing any of the following intangible assets: Copyrights, Corporate name and logo, Customer lists, Customer relationships (contractual and non), Franchise agreements, Internet domain names, Lease agreements, Licenses, Mailing lists, Music, video and book rights, Non-compete agreements, Packaging design and copyrights, Patents, In -process research and development (IPRD), Royalty agreements, Use rights (drilling, air rights, timber cutting rights) and others.
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