Valuation of business and intangible assets

Question 1

what is an intangible asset?

Answer 1

‘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.

Question 2

Give an example of intangible assets

Answer 2

Patents
Domain Names
WIP - Contracts
Copyrights

Question 3

The main drivers that affect value

Answer 3

Market trends
Legal rights
Technology
External perceptions

Question 4

The latest relevant valuation standards

Answer 4

IVS 210: INTANGIBLE ASSETS
IVS 200 Businesses and Business Interests

VPGA 3 – Valuation of businesses and business interests
VPGA 6 – Valuation of intangible assets

Question 5

The different reasons for which business and intangible asset valuations may be required?

Answer 5

Purchase & Sale
Insolvency
Securing Investment
Accounting

Question 6

Methods of valuation

Answer 6

Market approach
Income approach
Cost approach

Question 7

Market approach

Answer 7

Comparable method - transactions involving identical or similar assets

Domain name - considered is it a keyword, memorable, market trends

Question 8

What are the restrictions with market approach when valuing intellectual property.

Answer 8

Comparable evidence can be difficult to find as intellectual property is often unique.

Question 9

When carrying out the valuation of the WIP what method did you use.

Answer 9

Income approach - top down method.

Top down method is approach through inventory valuations however intangible assets are effectively imbedded in the inventory/WIP, identification of costs that benefit future periods

Question 10

What is a top down method?

Answer 10

It’s a valuation method recently stated in 230 Inventory exposure draft - 2020

Included in IVS 220 A method to value non-financial liabilities under the Market Approach.

The Top-Down Method is a residual method that begins with the estimated selling price and deducts remaining costs and estimated profit.

Question 11

The key steps in applying the Top-Down Method are to

Answer 11

1. Identify the selling price
2. Work out the current position of the WIP and estimate the costs to complete
   3.

Question 12

RICS Guidance on valuation intellectual property

Answer 12

Valuation of intellectual property rights - 2nd edition, March 2020 - guidance note

Question 13

what are Non-identifiable intangible assets

Answer 13

‘goodwill’ - arising from contractual or legal rights that may or may not be separable from the entity, or
other rights and obligations

Question 14

Four types of assets

Answer 14

Market related assets
customer or supplier related assets
artistic related assets
technology related assets

Question 15

Market related assets

Answer 15

typically associated with, and primarily used in, the
marketing or promotion of a company’s products or services
trademarks
brands,
trade names
internet domain names

Question 16

customer or supplier related assets

Answer 16

customer or supplier related assets: arise from relationships with, or knowledge of, customers and suppliers, and are used in the development, procurement, management and maintenance of a company’s customers
customer lists,
order or production backlog
customer contracts and related relationships
non-contractual customer relationships)

Question 17

artistic related assets

Answer 17

artistic related assets: arise from artistic products or services that are protected by a contractual or legal right (copyright and design), and give rise to benefits including royalties from artistic works
plays, operas, ballet, books, magazines, newspapers,
musical works, pictures, photographs, videos, films, television programmes

Question 18

technology related assets

Answer 18

technology related assets: these represent the value of technological innovation or advancements, and can arise from non-contractual rights to use technology, or
be protected through legal or contractual rights patented technology
computer software
unpatented technology
databases
manufacturing processes and know-how

Question 19

Valuation due diligence in intellectual property

Answer 19

In line with PS 2 section 2, valuers should have appropriate competency in intangible
asset valuation. As a minimum requirement, a valuer should not contemplate carrying out
a valuation in the absence of a detailed knowledge and understanding of such issues as:

• the rights of the owners of the asset(s)
• the history of, and activities associated, with the asset(s)
• as appropriate, the state of the subject industry, the general economic outlook and political factors.

Question 20

Valuation approaches

Answer 20

valuation theory recognises three distinct approaches in valuation, including for intangibles. These are the market approach (sometimes known as the direct
market comparison approach), the income approach, and the cost approach.

Question 21

Market approach

Answer 21

The market approach measures the value of an asset by comparing recent sales or offerings of similar or substitute property and related market data. However, it is rarely possible to find such evidence relating to identical assets.

The two primary market approach methods are the ‘market multiple method’ and the ‘similar transactions method’.

Question 22

Market multiple method

Answer 22

focuses on comparing the subject asset with guideline data such as industry royalty rates. In applying this method, matters such as royalty rates are evaluated and adjusted based on the strengths and weaknesses of the subject asset relative to similar assets. They are then applied to the appropriate operating data of the
subject asset to arrive at an indication of value. Appropriate adjustments to reflect different
properties or characteristics are usually made to the derived data.

Question 23

similar transactions method

Answer 23

uses valuation data based on historical transactions that have occurred in the subject asset’s direct or related industries. The derived data are then
adjusted and applied to the appropriate operating data of the subject asset to arrive at an indication of value.