How To Value Intangibles Assets and Intellectual Property
Three primary approaches apply to the valuation of intangible assets: the Income approach, the Market Comparable approach, and the Cost approach. Numerous modifications of these approaches have been developed over the years. The value of an intangible may be based on using one or various combinations of these approaches.
Certain events trigger a need for the valuation of Intangible Assets and Intellectual Property, for example:
- An intangible asset and purchase price allocation appraisal should be performed when accounting for business combinations under ASC 805. GAAP and IFRS require the purchase price paid for a company be properly allocated to the assets acquired and liabilities assumed at their respective fair values.
- For a Transfer pricing study Asset Valuation (IRS Section 482) or royalty rate study which involves licensing of an intangible asset such as a trademark, patent or technology to related party companies.
- An intangible asset valuation should be performed in order to comply with the goodwill and other intangible assets impairment testing requirement of ASC 350.
- An intangible asset valuation should be performed when contemplating a licensing arrangement of brands, trademark, technology or other proprietary assets.
Remaining Useful Life of Intangible Assets or Intellectual Property
For Fair Value financial reporting purposes, the remaining useful life determination of intangible assets is required. Estimating the useful life is important in determining the value. Generally the longer the life, the more valuable the intangible asset.
For IRS Federal income tax purposes, the remaining useful life determination of intangible assets and intellectual property is as important as the appraisal. The Internal Revenue Service allows for the amortization of intangible assets only when the taxpayer establishes that the assets have an ascertainable value separate and distinct from goodwill, and have a limited useful life whose duration can be ascertained with reasonable accuracy. In order to prove that these intangible assets are wasting and have a reasonably determinable useful life, we perform an obsolescence, decay and lifing analysis.