39117748 introduction-to-intangible-assets


Published on

1 Like
  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

39117748 introduction-to-intangible-assets

  1. 1. Valuation Transaction Consulting Real Estate Advisory Fixed Asset ManagementIntroduction to Intangible AssetsPresented by Varun Gupta ®
  2. 2. AgendaIntroduction and Overview of ObjectivesSection One: What Are Intangible Assets?Section Two: Why & How We Value Intangible Assets?Section Three: Reconciling the Valuation of Intangible Assets 1
  3. 3. IntroductionsInstructor:Managing Director, American Appraisal India Pvt. Ltd.MBA from IIM CalcuttaOver 14 years of Financial Advisory experience 11 years in PwC 2 years in Deloitte 1 year at American AppraisalKey experience Business and intangible assets valuation Financial planning and business modelingContact Details Email: vgupta@american-appraisal.com Mobile: +91 99 6766 4231 2
  4. 4. Course ObjectivesThe overall objective of this course is to provide you with a workingknowledge of intangible assets, why and how they are valued, and how theyrelate to the overall business enterpriseBy the end of this course, you should be able to: Define intangible assets Describe the major categories of intangible assets Identify the commonly recognized intangible assets Define the three most common valuation approaches Assess which valuation approach(es) best applies to some of the individual intangible assets 3
  5. 5. Section One:What Are Intangible Assets?
  6. 6. AgendaSection One: What Are Intangible Assets? Accounting Balance Sheet v/s Valuation Balance Sheet Definition and Overview Types of Intangible Assets Types of Intangible Assets Defined Q&A 5
  7. 7. Accounting Balance Sheet v/s Valuation Balance Sheet Book Value and Market Value (as of March 31, 2009) Book Value Market Value Premium over Book Company (INR Bn) (INR Bn) Value Hindustan Unilever Ltd. 20.6 517.7 2,411% Infosys Technologies Ltd. 182.5 758.4 315% ITC Ltd. 137.4 697.7 408% 6* As of March 31,2008
  9. 9. Definition and OverviewAS 26(6) of ICAI defines an Intangible Asset as:“an identifiable non-monetary asset, without physical substance, held foruse in the production or supply of goods or services, for rental to others, orfor administrative purposes.”IAS 38.8 of International Accounting Standard defines an Intangible Assetas:“An identifiable nonmonetary asset without physical substance” 8
  10. 10. Types of Intangible AssetsTry to name some of the potential intangible assets a business enterprisemay possess Potential Assets Customer Relationships Contracts Trademarks / Trade Names Internally Developed Software In Process Research and Development Favorable Vendor Agreements Non-Compete / Non-Solicitation Agreements Trained and Assembled Workforce Applicable Licenses 9
  11. 11. Types of Intangible AssetsIntangible assets can be classified into the following categories. Marketing-related intangible assets Customer-related intangible assets Technology-based intangible assets Contract-based intangible assets Artistic-related intangible assets Other intangible assets 10
  12. 12. Marketing-Related AssetsDefinition Primarily used in the marketing or promotion of products or servicesTypes of assets Trademarks, trade names Service marks, collective marks, certification marks Trade dress (unique color, shape, or package design) Internet domain names Noncompetition agreementsMost commonly valued assets Trademarks and trade names Noncompetition agreements 11
  13. 13. Marketing-Related AssetsTrademarks Any word, name, symbol or device or other devices used in trade to indicate the source of a product and to distinguish it from the products of others Legal Protection via – Patents – Copyright Examples – Reliance “R” – Nike swoosh – Coca-Cola script 12
  14. 14. Marketing-Related AssetsTrade names Name under which a particular business is carried on by a company –Trade name is the name of the company, while the trademark is related to the products or services sold by that company Examples –Britannia, Kingfisher and Nokia names 13
  15. 15. Marketing-Related AssetsInternet domain name Unique alphanumeric name that is used to identify a particular Internet address, such as american-appraisal.com or icai.orgNoncompetition Agreements Agreement between buyer and seller of a business that restricts seller from competing in the same industry for a specific period of time, often within a defined geographic area 14
  16. 16. Customer-Related AssetsDefinition Relate to customer structure or customer relationships of the businessTypes of assets Customer lists Order or production backlog Customer relationships (contractual and non contractual)Most commonly valued assets Customer relationships (contractual and non contractual) 15
  17. 17. Customer-Related AssetsCustomer Lists Information about customers such as name and contact information –May also include other information such as order history and demographic information Although generally not derived from contractual or other legal rights, they are valuable and are frequently leased or exchanged. –Doctor or attorney client lists, magazine subscriber listsOrder or Production Backlog Source of future earnings from sales that have already been closed but not yet fulfilled Strong backlog can represent a guarantee of future profitsCustomer relationships A relationship exists between an entity and its customer if: –the entity has information about the customer and has regular contact with the customer; and –the customer has the ability to make direct contact with the entity. Can be contractual or non contractual 16
  18. 18. Technology-Based AssetsDefinition Relate to innovations or technological advances and are often protected through contractual or other legal rights.Types of assets Patented and unpatented technology Computer software Trade secretsMost commonly valued assets Computer software Patented and unpatented technology Databases 17
  19. 19. Technology-Based AssetsPatented technology A patent gives the inventor “the right to exclude others from making, using, offering for sale, or selling” the invention. Legal protection –A patent does not protect an idea but rather its embodiment in a product or process –“Patent Applied For” or “Patent Pending” have no legal effect –Patent protection ranges from 14 to 20 years –The standards of what is patentable and their duration differ from country to countryTrade secrets Information, including a formula, pattern, compilation, program, device, method, technique, or process, that –derives actual or potential independent economic value from not being generally known, and –is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Legal protection –Patentable in many cases, but not often elected –Potential relief in court if someone else improperly acquires or discloses the trade secret 18
  20. 20. Technology-Based AssetsComputer software Two categories –Product software for sale or license –Operational software for internal use Under certain circumstances, computer software may be subject to copyright, patent, or trade secret protection. 19
  21. 21. Contract-Based AssetsDefinition Rights that arise from contractual arrangementsMost commonly valued assets Licensing and royalty agreements Lease agreements Supply contracts Service contracts 20
  22. 22. Other Intangible AssetsIn process research & development (“IPR&D”) An asset is classified as IPR&D if it is a development project that has been initiated and has achieved material progress, but has not yet resulted in a technologically feasible, commercially viable product. 21
  23. 23. Other Intangible AssetsGoodwill Value of an enterprise that cannot be associated with any other asset –Going concern value –Excess economic income –Expectation of future events not related to current operationsAssembled workforce Value in avoiding the costs to locate, hire, and train employees 22
  24. 24. Questions? 23
  25. 25. Section Two:Why and How We Value Intangible Assets
  26. 26. AgendaSection Two: Why and How We Value Intangible Assets Introduction Valuation Purposes Valuation Approaches Tax Benefit of Amortization Expected Remaining Life Q&A 25
  27. 27. Valuation PurposesRegulatory ComplianceFinancial reporting requirements as per the different accounting standards: Financial Reporting Requirements as per IFRS –IFRS 3 – Business Combinations –Revised IAS 36 – Impairment of Assets –Revised IAS 38 – Intangible Assets Financial Reporting Requirements as per Indian GAAP –AS 26 – Intangible Assets Financial Reporting Requirements as per US GAAP –SFAS 141 – Business Combinations –SFAS 142 – Goodwill and Other Intangible Assets –SFAS 157 – Fair Value Measurements 26
  28. 28. Valuation PurposesOther uses for intangible asset valuation Transaction assessment General corporate planning and governance Financing (collateralization) Bankruptcy proceedings –Liquidation value Litigation support and dispute resolution Business formation and dissolution –Contribution of intangible assets by parties 27
  29. 29. Valuation Approaches Based on the present value of Income Approach expected future cash flows to be derived from ownership of the asset Cost Approach Based on the cost to reproduce or replace the asset Based on transactions involving Market Approach the sale or license of similar intangible assets in the marketplace 28
  30. 30. Valuation Approaches – IncomeRelief From Royalty Method Based on the cost savings of not having to pay a royalty to a third-party for use of the asset Common applications –Trademarks and trade names –Patents –Developed technology –Product software for sale or license 29
  31. 31. Valuation Approaches – IncomeMulti-Period Excess Earnings Method Based on present value of prospective net cash flow (or excess earnings) attributable to the asset Common applications –Brands –Customer Contracts/Relationships –Backlog –IPR&D –Contracts/Licenses –Developed technology –Product software for sale or license –Copyrights 30
  32. 32. Valuation Approaches – IncomeOther Incremental Income Methods Based on a comparison of the present value of the prospective revenues or expenses for the business with and without the asset in place Common applications –Noncompetition agreements –Favorable or unfavorable agreements and contracts 31
  33. 33. Valuation Approaches – CostPrinciple of substitution A buyer would pay no more for an asset than the cost to develop or construct an investment of equal utilityCost approach is appropriate when either: A perfect substitute for the intangible asset can be developed more cost effectively in- house, or Stage of development is so early that reliable forecasts of future benefits or markets do not exist 32
  34. 34. Valuation Approaches – CostMethodologies Replacement cost –Cost (at current prices) to recreate the utility of the asset, using modern materials, production standards, design, layout and quality of workmanship Reproduction cost –Cost (at current prices) to construct an exact replica of the asset, using the same materials, production standards, design, layout, and quality of workmanshipCommon applications Assembled workforce Internally developed/Internal use software Engineering drawings 33
  35. 35. Valuation Approaches – CostRequired inputs Three components of cost that need to be considered: –Materials - Costs related to tangible elements of development –Labor - Costs related to the human-capital elements of development –Overhead - Management and supervisory, support and administrative, and utility and operating cost elements of development Two components of cost that may be considered: –Intangible asset developers profit • Percentage return on developers investment, or • Fixed Rupee amount –Entrepreneurial incentive 34
  36. 36. Valuation Approaches – CostObsolescence - reflects that value is not necessarily equal to the sum ofhistorical costs Physical deterioration –Wear and tear resulting from continued use Functional obsolescence –Diminished function or utility due to design and construction features Technological obsolescence –Innovative changes that allow for lower cost, more efficient, or higher quality production, resulting in same or superior utility Economic obsolescence –Results from external factors such as changes in interest rates, inflation, required rates of return, and levels of supply and demand 35
  37. 37. Valuation Approaches - MarketPremise Based on guideline transactions involving similar intangible assets and similar market conditionsCommon applications Least commonly used approach to value intangible assets due to lack of an integrated market for specific intangibles Most commonly used to corroborate values from other approaches or establish a range of values –Trademarks, trade names, and patents 36
  38. 38. Amortization Tax BenefitAmortization of acquired intangible assets reduces taxable income andcreates an amortization tax benefitAs such, the value of an intangible asset is equal to the present value of: The asset’s after tax cash flows (excluding amortization of intangible assets); and The tax benefit resulting from the amortization of the intangible asset for income tax purposes 37
  39. 39. Expected Remaining LifeThe period over which an asset is expected to contribute to future cashflowsExpected Remaining Life depends upon following factors: The expected use of the asset by the acquirer and target The expected useful life of another asset or a group of assets to which the useful life of the intangible asset may relate Legal, regulatory, or contractual provisions that may limit the useful life or enable renewal or extension of the asset’s legal or contractual life without substantial cost Effects of physical deterioration, functional obsolescence, technological obsolescence, and economic obsolescence Level of maintenance expenditures required to obtain the expected future cash flows from the asset Estimation of the future benefit derived from the trademark and trade name 38
  40. 40. Questions? 39
  41. 41. Section Three:Reconciling the Valuation of Intangible Assets
  42. 42. AgendaSection Three: Reconciling the value of intangible assets Introduction Required Rates of Return Reconciling Value Indications Q&A 41
  43. 43. Required Rates of ReturnRequired rates of return attempt to estimate the return a typical investorwould require Dependant on perceived risk, liquidityThe weighted average cost of capital or “WACC” is the required return on abusiness entity’s invested capital (i.e. equity and debt). WACC = (% Debt * Kd * (1-Tax Rate)) + (% Equity * Ke) 42
  44. 44. Required Rates of ReturnThe component assets of a business require different returns Disparate returns reflect differences in perceived risk and liquidity Intangible assets are often considered the highest risk assets of a business enterprise due to: –Lack of versatility –Illiquidity –Susceptibility to competitive forces Goodwill generally has the highest required rate of return –Usually appears last in the development of a business –Disappears first in a business demise 43
  45. 45. Required Rates of ReturnThe valuation balance sheet revisited UnderlyingAssets Invested Capital Value Required Return=WARA= 15.0% Required Return=WACC=1 5.0% Normal Working Capital Required Return 6% Market Value of Interest- Bearing Debt Tangible and Other Assets Required Return 8% Required Return 8% Intangible Assets Market Value of Equity Required Returns Required Return 20% Patented Technology: 18% Customer Relationships: 22% Goodwill: 23% 44
  46. 46. Required Rates of ReturnEstablished business operations – intangible asset risk factors Degree of liquidity and versatility Ability to finance with debt versus equity Barriers to entry/Degree of competition Rate of technological innovation in the market Size of the market Ability to maintain customer loyalty Personnel risk (retention of employees with key expertise) Other risks specific to the intangible asset or its industryIn these instances, the required return can be estimated as a premium to theWACC or the cost of equity of the company 45
  47. 47. Required Rates of ReturnDevelopment-stage companies – intangible asset risk factors Remaining time to market History of the company bringing products to commercial success Probability of market and customer acceptance Viability of technology Probability of regulatory approval Anticipated competitor response Risk of achieving price/performance expectationsIn these instances the intangible assets are typically 100 percent equityfinanced Venture capital rates of return can be used to approximate return requirements 46
  48. 48. Contact details Varun Gupta Managing Director American Appraisal India Mobile: +91 99 6766 4231 Office: +91 22 4070 0123 vgupta@american-appraisal.com 47