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Robert Reilly
Reasons why CPAs need to value intangible assets

The list includes everything from transaction pricing to bankruptcies to strategic planning.

July 31, 2013
by Robert F. Reilly, CPA/ABV/CFF

Valuing intangible assets can prove to be a complex task that requires an understanding of the acceptable valuation approaches and the various methodologies. As indicated in AICPA Statement on Standards for Valuation Services (SSVS) No. 1, there are three generally accepted approaches to intangible asset valuation: the income approach, the market approach, and the cost approach.

CPA valuation analysts are often called on to perform intangible asset valuations for a variety of reasons and must understand the principles behind each of the three valuation approaches, including the specific methodologies within each approach. Many of the reasons why a CPA valuation analyst may be asked to value a commercial intangible asset follow.

Transaction pricing and structuring

  • Pricing the arm’s-length sale of an individual intangible asset or a portfolio of two or more intangible assets.
  • Pricing the arm’s-length license of an individual intangible asset or a portfolio of two or more intangible assets.
  • Calculating an exchange ratio between two owners for two respective intangible asset portfolios.
  • Measuring the equity allocations in a new business enterprise or joint venture when one or more parties contribute intangible assets.
  • Measuring the asset distributions in a liquidating business enterprise or joint venture when one or more of the parties receive intangible assets.
  • Pricing the transfer of an intangible asset between two wholly owned subsidiaries (or between two unequally owned subsidiaries) of a consolidated business enterprise.

Financing collateralization and securitization

  • Using an intangible asset as the collateral in either a cash flow-based or an asset-based debt financing.
  • Arranging the sale/license-back financing of a commercial intangible asset.

Taxation planning and compliance

  • Forming an intangible asset holding company and structuring the intercompany intangible asset license to the taxpayer’s operating companies.
  • Performing income tax basis purchase price allocations (among the acquired tangible assets and intangible assets) in a taxable business acquisition (e.g., a Sec. 1060 asset acquisition).
  • Quantifying the amortization deduction for a purchased intangible asset.
  • Valuing intangible assets in the taxpayer corporation insolvency exemption (Sec. 108) related to cancellation of debt (COD) income recognition.
  • Valuing corporation intangible assets related to built-in gain (BIG) tax deferral upon the taxpayer election to convert from a C corporation to an S corporation.
  • Supporting the charitable contribution deduction for a donated intangible asset.
  • Estimating the arm’s-length price (ALP) for the cross-border transfer and use of a multinational taxpayer corporation’s intangible asset (Sec. 482 compliance).
  • Complying with state and local ad valorem property taxation of either taxable or tax-exempt intangible assets.
  • Defending against IRS allegations of private inurement, excess benefits, or intermediate sanctions with regard to intangible asset transfers between a for-profit entity and a not-for-profit entity.

Regulatory compliance and corporate governance

  • Estimating the fair market value estimation of the intangible asset sale, license, or other transfer between a for-profit entity and a not-for-profit entity.
  • Performing the fair market value (asset-based approach) valuation of a going-concern business enterprise to be sold between a for-profit entity and a not-for-profit entity).
  • Documenting the custodial inventory and management of owned and licensed intangible assets.
  • Assessing the adequate insurance coverage for owned and licensed intangible assets.
  • Defending against infringement, misappropriation, diversion, other torts, breach of contract, and other wrongful acts to intangible assets.
  • Defending against allegations of dissipation of corporate assets.

Bankruptcy and reorganization

  • Valuing an intangible asset that is pledged as collateral for secured creditor financing.
  • Using an intangible asset as collateral for debtor in possession (DIP) secured financing.
  • Opining on the fairness (to creditors) of the sale or license of an intangible asset as a DIP cash generation spinoff opportunity.
  • Valuing an intangible asset in the performance of the debtor corporation solvency or insolvency tests (particularly the balance sheet test) with respect to fraudulent transfer claims and preference actions.
  • Measuring the impact of the intangible assets on the plan of reorganization of the bankrupt owner/operator.

Financial accounting and fair value reporting

  • Preparing the acquisition accounting (i.e., transaction purchase price) allocation among acquired tangible assets and intangible assets (FASB ASC Topic 805, Business Combinations).
  • Testing for goodwill impairment and for other intangible asset impairment (ASC topics 350, Intangibles—Goodwill and Other, and 360, Property, Plant, and Equipment).
  • Preparing the post-bankruptcy fresh start accounting for the emerging entity tangible assets and intangible assets (ASC Topic 852, Reorganizations).

Forensic analysis and dispute resolution

  • Calculating an intangible asset lost profits, reasonable royalty rate, or other economic damages analysis in infringement or other tort claims.
  • Measuring intangible asset lost profits or other economic damages in breach of contract, license, or noncompete/nondisclosure agreement damages claims.
  • Estimating intangible asset valuation in condemnation, expropriation, eminent domain, or dissipation of corporate assets claims.

Strategic planning and management information

  • Forming an intangible asset joint venture agreement, joint development agreement, or joint commercialization agreement.
  • Negotiating an inbound or outbound intangible asset use, development, commercialization, or exploitation agreement.
  • Identifying and negotiating of intangible asset license, spin-off, joint venture, and other commercialization opportunities.

As indicated above, there are many reasons why a CPA valuation analyst may be asked to estimate the value of intangible assets. Regardless of the intangible asset or the reason for the valuation, the analyst should consider all generally accepted intangible asset valuation approaches and methods.

To learn more about intangible asset valuation, register to attend the eight-part AICPA Webcast Series – Intangible Assets: Valuation and Related Topics. This webcast series will provide a comprehensive review of intangible assets: common engagement purposes, valuation methodologies, and related topics such as impairment testing. In addition, this series will provide an in-depth discussion related to topics critical to the valuation of five major categories of intangible assets: customer-related, contract-based, technology-based, marketing-related, and artistic-related. Register for the series bundle to receive significant savings.

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Robert Reilly, CPA/ABV/CFF, is a managing director of Willamette Management Associates, a business valuation consulting, forensic accounting, and financial opinion firm in Chicago.