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Frequently Asked Questions - Intangible Asset Valuation
- What does the Financial Accounting Standards
Board say about valuing intangible assets?
- Does Cambridge Partners value intangible
assets for licensing purposes?
- Can you please explain the market approach
to valuation as it relates to valuing a tradename?
- Can you please explain the income approach
to valuation as it relates to valuing a patent?
- What is the proper methodology for determining
the fair value of customer relationship intangibles?
- How is a trained and assembled workforce
valued?
- How is a warrant valued?
- What does the term fair value mean?
- How do you determine the value of a Non-Competition
Agreement (non- compete agreement)?
- Does Cambridge Partners perform intellectual
property appraisals for transfer pricing strategies?
- How is a bank core deposit intangible
asset valued?
- What are examples of intangible assets
Cambridge Partners & Associates can appraise?
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.
How is a warrant valued?
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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