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 valued?
- 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 asset valued?
- How is a Franchise Agreement valued?
- What are examples of intangible assets Cambridge Partners & Associates can appraise?
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.
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.
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.
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.
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.
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.
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.
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.
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.
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).
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.
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.
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.
There are various ways to appraise a franchise agreement, inlcuding the market approach and various methods of the income approach. One of the most frequently utilized methods utilized is the "with" and "with-out" method. In this approach, a discounted cash flow model is developed to compare and contrast the projected cash flows assuming the franchise agreements are in place and not in-place. Simply put, the difference between the forecasts represents the cash flow attributable to the franchise agreement.
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.