17

th

Asean Valuers Association Congress

2-5 July 2012 Brunei Darussalam

Practice Guidelines for Valuing Intangible Assets

By Dr Lim Lan Yuan President (VGP), Singapore Institute of Surveyors and Valuers

Outline

1. Introduction 2. Classification of intangible assets 3. Characteristics of intangible assets 4. Practice Guide 5. Methods of Valuation 5.1 Market based 5.2 Cost based 5.3 Income based 6. Conclusion

1 Introduction

• • • Purpose of paper is to develop a guideline for valuing intangible assets Intangible assets have special characteristics that need to be taken into account Defined as identifiable non-monetary asset without physical substance held for use in production or supply of goods and services (IAS 38)

2 Classification of intangible assets

Two broad categories: a) Business goodwill b) Definable intangible asset

a) Business goodwill

• • • Goodwill refers to the value of an entity over and above the value of its assets An important intangible asset that represents portion of business that cannot be attributed to other business assets Can be valued as a whole by procedures that are specific to the capitalisation of excess earnings or income (existence of earnings above a fair return on all other business assets)

Conventional method

• • • • • Determine net operating profit from total historical costs of tangible and intangible assets Calculate normal net profit related to value of assets employed in business Work out the super profits from the difference between net operating profit and normal annual profit Determine discount rate and period Calculate value of goodwill based on present value of super profit over period

b) Definable intangible asset

• • • • • • • Refers to any commercially transferable interest in any following items: Patents, inventions, processes, designs, trade secrets or know-how Copyrights, literary, musical or artistic compositions Trademarks, trade names or brand names Franchises or licenses Systems, procedures, forecasts Computer software Other similar items which derive their value not from physical attributes but from their intellectual content or other intangible properties.

• It should be noted that certain kinds of intangible property are also referred to as intellectual property registered under legislation for protection.

3 Characteristics of intangible assets

• • • • • Intangible property should have following characteristics: Capable of being identified and recognised Subject to ownership and can be legally transferable Subject to legal protection which may be incorporated within a larger entity Capable of generating some measurable amount of economic benefit Can potentially enhance value of other assets with which it is associated.

4 Practice Guide

• • Based on WAVO Valuation Competency and Practice Guide Outlines the scope, analysis and methods of valuation

Valuation report

• • • • • • • • • • Property to be valued Interest to be valued Date of valuation Purpose and use of valuation Definition of value Methods of valuation Assumptions made Limiting conditions Restrictions, agreements and other factors that may influence value Sources of information.

Details of asset

• • • General description and analysis of what constitutes the intangible property The specific intangible property to be clearly identified Description should provide a complete identification of relevant transactions, and may also specify physical, functional, technical or economic parameters to identify the particular intangible property

Analysis

• • • • • All factors affecting the value should be considered including: Analysis of the risks of ownership Market conditions at the valuation date Market demand for the subject property Effects of relevant legal or contractual restrictions Whether the property needs additional developments, and the length of time required to get the property to market

• • • • • Analysis of any relevant transactions including: All material facts Information concerning contracts and transactions including agreements and schedules Form of consideration paid and received, and dates All participants and their respective roles Any legal, accounting, financial, and economic opinions made.

Risks associated with acquisition of property

• • • • • Manufacturing risks Marketing risks from fluctuating costs, demand, and pricing; and competitors’ risks Research and development risks Risks associated with government regulations Other legal risks eg legal activities required to secure exclusivity of a product or process.

5 Methods of Valuation

• To use judgement in selecting appropriate approaches (such as market, cost or income) to be adopted and the method(s) within such approaches that best indicate the value of the property.

5.1 Market-based methods

• • • Market-based methods rely on identification of comparable intangible property sold under similar conditions. Requires presence of an active market involving comparable property.

Method involves identifying comparable intangible assets in terms of general standards of comparability eg functions, contractual terms, risks, economic conditions

Comparability

• • • • Used for similar products or processes within same industry or market In the same stage of development and possessed a similar degree of uniqueness Have similar profit potential including a consideration of capital investment and start-up expenses required and the risks to be assumed Have similar terms eg exploitation rights, geographic limitations, exclusivity, duration, and functions or services to be performed.

5.2 Cost-based methods

• • Method involves the estimation of the cost to reproduce or replace or to pay or purchase the subject intangible property Replacement costs include cost of labour, materials, overheads and profit during development as well as design, and other fees eg legal costs and taxes

5.3 Income-based methods

• • Method focuses on the income-producing capacity of intangible property. Relies on estimates, future earnings, the duration of income streams, and risks associated with the realisation of the forecasted income.

Different ways

• • • Capitalise profit that can be derived from intangible asset Capitalise value of hypothetical royalty payment that has to be paid Use discounted cash flow over period based on shorter of economic or legal life

Factors affecting

• • • Income generation capacity of subject intangible property and future stream of earnings or cash flow; Expected remaining useful life of intangible property, how long is the expected economic benefit, which may depend on the product life cycle; Risk associated with receiving anticipated benefits, as may be measured by the discount rate reflecting the opportunity cost of capital, inflation, liquidity, risk premium and real interest.

Final value

• • Final opinion of value should reflect appropriateness of each method, and the reliability of the data supporting each method.

Only those approaches and methods deemed appropriate for dealing with the valuation issue in question should be considered, giving reasons for using them.

Conclusion

• The sensitivity of the methods applied to various assumptions made and parameters used including sensitivity of projections, discount rates, and useful lives should be considered

Thank you