IVS 210 INTANGIBLE ASSETS

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 Businesses

Marketing and Non-financial

Business & Customer lists liabilities
Intangible Assets
Valuation Social value Goodwill

Inventory Brands

Intellectual
Property
IVS 210:
Intangible Assets
 Application

An intangible asset is a non-monetary asset that manifests itself by its economic properties. It does not
have physical substance but grants rights and/or economic benefits to its owner.

Common methodologies for measuring ECL

Specific intangible assets are defined and described by characteristics such as their ownership, function,
market position and image. These characteristics differentiate intangible assets from one another.
 Types of Intangibles

General Categories of Intangibles:

Marketing-related: Examples include trademarks, trade names, unique trade design and internet domain names.

Common methodologies for measuring ECL

Customer-related: Examples customer lists, backlog, customer contracts, and contractual and non-contractual
customer relationships.

Artistic-related: Examples plays, books, films and music, and from non-contractual copyright protection.

Contract-related: Contract-related intangible assets represent the value of rights that arise from contractual
agreements. Examples include licensing and royalty agreements, service or supply contracts, lease
agreements, permits, broadcast rights, servicing contracts, employment contracts and non-competition
agreements and natural resource rights.

Technology-based: Technology-related intangible assets arise from contractual or non-contractual rights to use
patented technology, unpatented technology, databases, formulae, designs, software, processes or recipes.
 What am I valuing?

Particularly in valuing an intangible asset, valuers must understand specifically what needs to be valued and the
purpose of the valuation.

For example, customer data (names, addresses, etc) typically has a very different value from customer contracts
Common methodologies for measuring ECL
(those contracts in place on the valuation date) and customer relationships (the value of the ongoing customer
relationship including existing and future contracts).

Brand value from distribution network value.

What intangible assets need to be valued and how those intangible assets are defined may differ depending on
the purpose of the valuation, and the differences in how intangible assets are defined can lead to significant
differences in value.
 What am I valuing?

Valuers may perform direct valuations of intangible assets where the value of the intangible assets is the
purpose of the analysis or one part of the analysis.

However, when valuing businesses, business interests, real property, and machinery and equipment, valuers
Common methodologies for measuring ECL
should consider whether there are intangible assets associated with those assets and whether those directly or
indirectly impact the asset being valued.

For example, when valuing a hotel based on an income approach, the contribution to value of the hotel’s brand
may already be reflected in the profit generated by the hotel.
 Market Approach

Where evidence of either prices or valuation multiples is available, valuers should make adjustments to these to
reflect differences between the subject asset and those involved in the transactions.

These adjustments are necessary to reflect the differentiating characteristics of the subject intangible asset and the
assets involved in the transactions. Such adjustments may only be determinable at a qualitative, rather than
quantitative, level.

However, the need for significant qualitative adjustments may indicate that another approach would be more
appropriate for the valuation.
 Income Approach

Under the income approach, the value of an intangible asset is determined by reference to the present value of
income, cash flows or cost savings attributable to the intangible asset over its economic life.

Income related to intangible assets is frequently included in the price paid for goods or a service. It may be
challenging to separate the income related to the intangible asset from income related to other tangible and
intangible assets. Many of the income approach methods are designed to separate the economic benefits
associated with a subject intangible asset.

The most common method applied to the valuation of intangible assets and is frequently used to value intangible
assets including the following:
(a) technology,
(b) customer-related intangibles (eg, backlog, contracts, relationships),
(c) tradenames/trademarks/brands,
(d) operating licenses (eg, franchise agreements, gaming licenses, broadcast spectrum), and
(e) non-competition agreements.
 Income Approach - Methods

There are many income approach methods. The more common ones are :

(a) excess earnings method,

(b) relief-from-royalty method,
(c) premium profit method or with-and-without method,
(d) greenfield method, and
(e) distributor method.
 Income Approach – Excess Earnings

The excess earnings method estimates the value of an intangible asset as the present value of the cash flows
attributable to the subject intangible asset after excluding the proportion of the cash flows that are attributable to
other assets required to generate the cash flows (“contributory assets”).

It is often used for valuations where there is a requirement for the acquirer to allocate the overall price paid for a
business between tangible assets, identifiable intangible assets and goodwill.

Contributory assets are assets that are used in conjunction with the subject intangible asset in the realisation of
prospective cash flows associated with the subject intangible asset. Assets that do not contribute to the
prospective cash flows associated with the subject intangible asset are not contributory assets.

The excess earnings method can be applied using several periods of forecasted cash flows (“multi-period excess
earnings method” or “MPEEM”), a single period of forecasted cash flows (“single-period excess earnings method”)
or by capitalising a single period of forecasted cash flows (“capitalised excess earnings method” or the “formula
method”).
Asset Standards – IVS 210 Intangible Assets
 Income Approach – Excess Earnings

The excess earnings method can be applied using several periods of forecasted cash flows (“multi-period excess
earnings method” or “MPEEM”), a single period of forecasted cash flows (“single-period excess earnings method”)
or by capitalising a single period of forecasted cash flows (“capitalised excess earnings method” or the “formula
method”).

The capitalised excess earnings method or formula method is generally only appropriate if the intangible asset is
operating in a steady state with stable growth/decay rates, constant profit margins and consistent contributory
asset levels/charges.

As most intangible assets have economic lives exceeding one period, frequently follow non-linear growth/decay
patterns and may require different levels of contributory assets over time, the MPEEM is the most commonly used
excess earnings method as it offers the most flexibility and allows valuers to explicitly forecast changes in such
inputs.
 Income Approach – Excess Earnings

Whether applied in a single-period, multi-period or capitalised manner, some key elements to be considered:

c) adjust the expenses to exclude those related to creation of new intangible assets that are not required to generate the
forecasted revenue and expenses. Profit margins in the excess earnings method may be higher than profit margins for the
overall business because the excess earnings method excludes investment in certain new intangible assets. For example:

1. research and development expenditures related to development of new technology would not be required when valuing only
existing technology, and
2. marketing expenses related to obtaining new customers would not be required when valuing existing customer-related
intangible assets.

(d) identify the contributory assets that are needed to achieve the forecasted revenue and expenses. Contributory assets often
include working capital, fixed assets, assembled workforce and identified intangible assets other than the subject intangible
asset,

(e) determine the appropriate rate of return on each contributory asset based on an assessment of the risk associated with that
asset. For example, low-risk assets like working capital will typically have a relatively lower required return. Contributory
intangible assets and highly specialised machinery and equipment often require relatively higher rates of return,
 Income Approach – Excess Earnings

Contributory asset charges (CACs) should be made for all the current and future tangible, intangible and financial
assets that contribute to the generation of the cash flow, and if an asset for which a CAC is required is involved in
more than one line of business, its CAC should be allocated to the different lines of business involved.

CACs are generally computed on an after-tax basis as a fair return on the value of the contributory asset, and in
some cases a return of the contributory asset is also deducted. The appropriate return on a contributory asset is
the investment return a typical participant would require on the asset. The return of a contributory asset is a
recovery of the initial investment in the asset. There should be no difference in value regardless of whether CACs
are computed on a pre-tax or after-tax basis.
 Income Approach – Excess Earnings

The excess earnings method should be applied only to a single intangible asset for any given stream of revenue
and income (generally the primary or most important intangible asset).

For example, in valuing the intangible assets of a company utilising both technology and a tradename in delivering
a product or service (ie, the revenue associated with the technology and the tradename is the same), the excess
earnings method should only be used to value one of the intangible assets and an alternative method should be
used for the other asset.

However, if the company had multiple product lines, each using a different technology and each generating distinct
revenue and profit, the excess earnings method may be applied in the valuation of the multiple different
technologies.
 Income Approach – Relief from Royalty

Under the relief-from-royalty method, the value of an intangible asset is determined by

reference to the value of the hypothetical royalty payments that would be saved through owning
the asset, as compared with licensing the intangible asset from a third party.

Conceptually, the method may also be viewed as a discounted cash flow method applied to the
cash flow that the owner of the intangible asset could receive through licensing the intangible
asset to third parties.
 Income Approach – Relief from Royalty – Key Steps

The key steps are:

(a) develop projections associated with the intangible asset being valued for the life of the subject intangible
asset. The most common metric projected is revenue, as most royalties are paid as a percentage of revenue.
However, other metrics such as a per-unit royalty may be appropriate in certain valuations,

(b) develop a royalty rate for the subject intangible asset. Two methods can be used to derive a hypothetical
royalty rate. The first is based on market royalty rates for comparable or similar transactions. A prerequisite
for this method is the existence of comparable intangible assets that are licensed at arm’s length on a regular
basis. The second method is based on a split of profits that would hypothetically be paid in an arm’s length
transaction by a willing licensee to a willing licensor for the rights to use the subject intangible asset,
 Income Approach – Relief from Royalty – Key Steps

(d) estimate any additional expenses for which a licensee of the subject asset would be responsible. This can
include upfront payments required by some licensors.

A royalty rate should be analysed to determine whether it assumes expenses (such as maintenance, marketing
and advertising) are the responsibility of the licensor or the licensee.

A royalty rate that is “gross” would consider all responsibilities and expenses associated with ownership of a
licensed asset to reside with the licensor,

A royalty that is “net” would consider some or all responsibilities and expenses associated with the licensed
asset to reside with the licensee.

Depending on whether the royalty is “gross” or “net”, the valuation should exclude or include, respectively, a
deduction for expenses such as maintenance, marketing or advertising expenses related to the hypothetically
licensed asset,
 Income Approach – Relief from Royalty – Key Steps

When selecting a royalty rate, a valuer should also consider the following:

(a) When entering a licence arrangement, the royalty rate participants would be willing to pay depends on their profit
levels and the relative contribution of the licensed intangible asset to that profit. For example, a manufacturer of
consumer products would not license a tradename at a royalty rate that leads to the manufacturer realising a lower
profit selling branded products compared with selling generic products.

(b) When considering observed royalty transactions, a valuer should understand the specific rights transferred to the
licensee and any limitations. For example, royalty agreements may include significant restrictions on the use of a
licensed intangible asset such as a restriction to a particular geographic area or for a product. In addition, the valuer
should understand how the payments under the licensing agreement are structured, including whether there are
upfront payments, milestone payments, puts/calls to acquire the licensed property outright, etc.
 Income Approach – With and Without

The with-and-without method indicates the value of an intangible asset by comparing two scenarios: one in which
the business uses the subject intangible asset and one in which the business does not use the subject intangible
asset (but all other factors are kept constant).

The comparison of the two scenarios can be done in two ways:

(a) calculating the value of the business under each scenario with the difference in the business values being the
value of the subject intangible asset, and

(b) calculating, for each future period, the difference between the profits in the two scenarios. The present value of
those amounts is then used to reach the value of the subject intangible asset.

The with-and-without method is frequently used in the valuation of non-competition agreements but may be
appropriate in the valuation of other intangible assets in certain circumstances.
Asset Standards – IVS 210 Intangible Assets
 Income Approach – Greenfield Method

Under the greenfield method, the value of the subject intangible is determined using cash flow projections
that assume the only asset of the business at the valuation date is the subject intangible. All other tangible
and intangible assets must be bought, built or rented.

The greenfield method is conceptually similar to the excess earnings method. However, instead of
subtracting contributory asset charges from the cash flow to reflect the contribution of contributory assets, the
greenfield method assumes that the owner of the subject asset would have to build, buy or rent the
contributory assets. When building or buying the contributory assets, the cost of a replacement asset of
equivalent utility is used rather than a reproduction cost.

The greenfield method is often used to estimate the value of ”enabling” intangible assets such as franchise
agreements and broadcast spectrum
 Income Approach – Distributor Method

The distributor method, sometimes referred to as the disaggregated method, is a variation of the multi-period
excess earnings method sometimes used to value customer-related intangible assets.

The underlying theory of the distributor method is that businesses that are comprised of various functions are
expected to generate profits associated with each function.

As distributors generally only perform functions related to distribution of products to customers rather than
development of intellectual property or manufacturing, information on profit margins earned by distributors is used
to estimate the excess earnings attributable to customer-related intangible assets.

The distributor method is appropriate to value customer-related intangible assets when another intangible asset
(for example, technology or a brand) is deemed to be the primary or most significant intangible asset and is
valued under a multi-period excess earnings method.
 Income Approach – Distributor Method – Key steps

(a) prepare projections of revenue associated with existing customer relationships. This should reflect expected growth in
revenue from existing customers as well as the effects of customer attrition,

(b) identify comparable distributors that have customer relationships similar to the subject business and calculate the profit
margins achieved by those distributors,

(c) apply the distributor profit margin to the projected revenue,

 Income Approach – Distributor Method – Key steps

(d) identify the contributory assets related to performing a distribution function that are needed to achieve the forecast revenue
and expenses.

Generally distributor contributory assets include working capital, fixed assets and workforce as distributors seldom require other
assets such as trademarks or technology. The level of required contributory assets should also be consistent with participants
performing only a distribution function,

(e) determine the appropriate rate of return on each contributory asset based on an assessment of the risk associated with that
asset,

(f) in each forecast period, deduct the required returns on contributory assets from the forecast distributor profit to arrive at the
excess earnings attributable to only the subject intangible asset,
 Cost Approach

Under the cost approach, the value of an intangible asset is determined based on the replacement cost of a
similar asset or an asset providing similar service potential or utility.

The cost approach is commonly used for intangible assets such as the following:
(a) acquired third-party software,
(b) internally-developed and internally-used, non-marketable software, and
(c) assembled workforce.
 IVS 105

The cost approach may be used when no other approach is able to be applied; however, a valuer should attempt
to identify an alternative method before applying the cost approach in situations where the subject asset does not
meet the criteria in paras 60.2 and 60.3 of IVS 105 Valuation Approaches and Methods.

The cost approach should be applied and afforded significant weight under the following circumstances:

(a) participants would be able to recreate an asset with substantially the same utility as the subject asset, without
regulatory or legal restrictions, and the asset could be recreated quickly enough that a participant would not be
willing to pay a significant premium for the ability to use the subject asset immediately,
(b) the asset is not directly income-generating and the unique nature of the asset makes using an income
approach or market approach unfeasible, and/or

(c) the basis of value being used is fundamentally based on replacement cost, such as replacement value.
 IVS 105

Although the circumstances in para 60.2 would indicate that the cost approach should be applied and afforded
significant weight, the following are additional circumstances where the cost approach may be applied and
afforded significant weight. When using the cost approach under the following circumstances, a valuer should
consider whether any other approaches can be applied and weighted to corroborate the value indication from the
cost approach:

(a) participants might consider recreating an asset of similar utility, but there are potential legal or regulatory
hurdles or significant time involved in recreating the asset,

(b) when the cost approach is being used as a reasonableness check to other approaches (for example, using
the cost approach to confirm whether a business valued as a going-concern might be more valuable on a
liquidation basis), and/or

(c) the asset was recently created, such that there is a high degree of reliability in the assumptions used in the
cost approach.