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Price Tags on Technology: No Simple Solutions

As technology-driven companies contribute innovations that become increasingly interwoven with the economy, CPAs will be called upon to value technology for financial reporting, legal and tax purposes.

November 2008
by Bryan Katz and Marc Olsen/Journal of Accountancy

As technology-driven companies contribute innovations that become increasingly interwoven with the economy, CPAs will be called upon to value technology for financial reporting, legal and tax purposes.

In today’s increasingly technology-driven economy, CPA/ABVs (Accredited in Business Valuation) face an arduous task in putting a price on technology-based intellectual property. Even with examples like Google’s search engine, Apple’s iPod, or Microsoft’s Windows platform, in which established markets exist and discrete revenue streams can be tied to a specific technology, determining value apart from other intangible assets can prove extremely challenging.

Yet, as technology-driven companies continue to emerge and their innovations become increasingly interwoven with the economy, CPAs, valuation specialists and company management will be called upon more frequently to value technology for financial reporting, legal and tax purposes. This article examines technology-based assets and explores the methods and challenges in identifying and valuing them.

Measuring Technology

Technology is a broad term that can encapsulate a variety of meanings in accounting and valuation contexts. Valuation professionals define technology-based intangibles as possessing value that is attributable to proprietary knowledge and processes, whether developed or purchased, that provide or have the opportunity to provide significant competitive advantages and/or product differentiation. In our experience working with numerous technology companies as financial consultants specializing in valuation, we find that current technology is often the primary intangible asset identified and valued, apart from other customer-related intangibles, trade names and trademarks.

Numerous reasons exist for valuing technology-based intangibles, including, but not limited to, financial reporting, tax, strategic or litigation purposes. Notably, for financial reporting, according to FASB’s Statement no. 141, Business Combinations, and as reiterated in the revised version, Statement no. 141(R), acquirers in business combinations must allocate the total purchase price to acquire its target to the assets it acquired, including its intangible assets.

This article has been excerpted from the Journal of Accountancy. Read the full article here.