Frequently Asked Questions - Intangible Asset Valuation
- What does the Financial Accounting Standards
Board (FASB) say about valuing intangible assets under FASB 141 and 142?
- Does Cambridge Partners value intangible
assets for licensing purposes?
- Please explain the Accounting Standards Codifications,
for example ASC 350, ASC 805 and ASC 360
- 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
- How are stock based compensation (stock options) and stock
appreciation rights (SARS) valued?
- What is the definition of Fair Value?
- What assets should be
valued utilizing Fair Value?
- 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
- 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, FAS 141 addresses accounting
for business combinations. FAS 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 & Associates value intangible assets for licensing
or transfer pricing purposes?
Yes. Cambridge Partners values patents, trademarks, tradenames,
technology and other intangible assets for licensing and cross border transfer pricing
purposes. We understand that a well known or designed intangible
asset 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.
Please explain the Accounting Standards Codifications,
for example ASC 350, ASC 805 and ASC 360
In July, 2009, when the Financial Accounting Standards Board
launched the Accounting Standards Codification (the FASB ASC). The
FASB ASC replaced all previously existing financial accounting
standards (other than U.S. Securities and Exchange Commission
pronouncements) to become the single source of authoritative
nongovernmental U.S. generally accepted accounting principles. Going
forward, instead of issuing new standards (e.g., SFAS 141), the FASB
will issue updates to the FASB ASC, such as ASC 805.
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 (have sold) 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, a royalty
rate and/or profit split percentage can be applied to the valued
tradenames expected future income via an income approach.
Trademarks appraised to comply with FASB statement 141
and SFAS 142 are often valued utilizing comparable market data and an income approach.
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, customer relationships are a significant asset
that must be quantified in order for the client to comply with FASB 141 (ASC 805).
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 and is not separable from Goodwill
(See SFAS 141 paragraph B168-169). In valuing a trained and assembled workforce, i.e. management, salesforce, MIS group,
etc., a cost savings approach is often utilized. 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 are stock options, stock appreciation rights (SARS) and deferred
compensation valued under IRC 409A or FASB 123R?
Stock options are generally valued using an accepted options pricing model, of
which there are many, including the well known Black-Scholes option pricing model.
These models determine either the econometric or theoretical value of the instrument
- that is, the price at which the option should sell in the marketplace.
Generally, the internal revenue service and SEC are concerned that although the issuer of a
stock right intended to establish an exercise price not less than the fair market value
of the stock at the time of grant, the issuer of the stock right may not be able to
demonstrate that the exercise price of the stock right was determined using a reasonable
valuation method. Accordingly, where a taxpayer can demonstrate that the exercise price of a
stock right granted was not less than the fair market value of the stock at the date of grant
and that the value of such stock was determined using a reasonable valuation method,
then that valuation will meet the requirements.
Option models are based on the assumption that it is possible to set up a perfectly
hedged position consisting of owning the shares of the stock and selling a call option on
the stock. Any movement in the price of the underlying stock will be offset by an opposite
movement in the option's value, resulting in no risk to the investor. In general, an option's
primary terms include the term of the option, its exercise price, its vesting period,
the exercise period and any transferability provisions. As such, in conducting option
valuations, it is important to consider these factors and several others, including:
the stock's volatility, the risk of the option and whether any dividends are paid.
The AICPA's suggested option pricing valuation methodology includes the Probability-Weighted
Expected Return Method (PWERM), the Option Pricing Method and the Current Value Method.
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. 157 (ASC 820) is:
The price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date.
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.
What assets should be valued utilizing
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).
A fair value measurement is for a particular asset or liability. Therefore, the measurement
should consider attributes specific to the asset or liability, for example, the
condition and/or location of the asset or liability might be a standalone asset
or liability (for example, a financial instrument or an operating asset) or a group
of assets and/or liabilities (for example, an asset group, a reporting unit, or a business).
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 a cost savings method, an income
approach, is utilized when valuing 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, Favorable and unfavorable lease agreements, Licenses, Mailing lists,
Music, video and book rights, Non-compete agreements, Packaging
design and copyrights, Patents, Trademarks and tradenames, In -process research and development
(IPRD), Royalty agreements, Supply agreements, Order Backlog, Core deposits, Goodwill, etc.
If you would like additional assistance or would like to discuss a potential intangible asset
valuation, please contact Cambridge Partners & Associates for
an initial evaluation consultation.