Valuation of intangible assets – Better guidance for practitioners

The International Valuation Standards Council (IVSC) has issued an exposure draft of IVS 210: Intangible Assets, which will become effective in 2017. Comments are due by July 7, 2016.

I believe that the proposed amendments provide much better guidance for practitioners compared the existing standard in IVS 2013. The streamlined standard explains in more detail the selection and application of the relevant valuation methods for intangible assets. Also, it addresses a wider range of purposes like tax reporting, litigation or transaction advice and does not only focus on financial reporting.

The content included previously in the Technical Information Paper (TIP) 3 is now incorporated in IVS 210, which streamlines the guidance significantly and, based on my first experience, makes working with the standard more comfortable. Further, the sometimes confusing label “commentary” has been removed completely from the standard. The step-by-step guidance is now fully mandatory and this should result in less variation in practice.

The changes which appear most significantly for me are:

• The income approach is now clearly the primary approach for most valuations, which is consistent with industry practice. The market approach is only applicable in very rare instances (e.g. for broadcast spectrum or internet domain names) and the cost approach is usually only used for software or assembled workforce
• The multi-period excess earnings method (“MPEEM”) should only applied for the primary or most important asset unless cash flows can be separated (e.g. for different technologies). This prevents the application of two or more MPEEMs as sometimes seen in practice, which creates very unstable valuation models (and thus also valuation results) due to the interrelation between different contributory assets
• The distributor method is now added for the valuation of customer relationships. It is applicable in case other assets such as trademark or technology are considered to be more important for the business. So far the MPEEM was the only method included in IVS 210 for the valuation of customer relationships. However, the MPEEM in my experience also leads to an overvaluation of the subject intangible asset and therefore offering another method in the standard should be welcomed.
• The standard discusses in more detail how an appraiser should determine the economic life of an intangible asset. In this context, the determination of the attrition rate for customer-related intangible assets is discussed in more detail (e.g. constant vs. variable attrition, attrition based on revenues or on number of customers). In IVS 2013 the important assumption of the economic life was not addressed adequately
• It is now mandatory to consider the IRR from recent arms-length transactions involving the subject intangible asset and the weighted average return on assets (“WARA”) in case all assets of a business are valued. On my valuation assignments, we always performed these analyses as a back-up check, but I welcome that they are now mandatory (and therefore in my opinion should also be included in the reporting)
• The application of the tax amortization benefit (“TAB”) is now discussed for each method. Overall it is applicable for valuations under the income approach if performed for financial reporting purposes. However, for valuations serving other purposes the TAB should be applied only if the transaction would actually result in a step-up for the intangible assets. Further, the new standard allows applying either the discount rate of the business or of the specific subject asset

The exposure draft of IVS 210 is available at:
IVS 210 Exposure Draft