1. Valuation
Transaction
Consulting
Real Estate
Advisory
Fixed Asset
Management
Introduction to Intangible Assets
Presented by Varun Gupta
®

2. Agenda
Introduction and Overview of Objectives
Section One: What Are Intangible Assets?
Section Two: Why & How We Value
Intangible Assets?
Section Three: Reconciling the Valuation of
Intangible Assets
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3. Introductions
Instructor:
Managing Director, American Appraisal India Pvt. Ltd.
MBA from IIM Calcutta
Over 14 years of Financial Advisory experience
11 years in PwC
2 years in Deloitte
1 year at American Appraisal
Key experience
Business and intangible assets valuation
Financial planning and business modeling
Contact Details
Email: vgupta@american-appraisal.com
Mobile: +91 99 6766 4231
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4. Course Objectives
The overall objective of this course is to provide you with a working
knowledge of intangible assets, why and how they are valued, and how they
relate to the overall business enterprise
By 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
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5. Section One:
What Are Intangible Assets?

6. Agenda
Section 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
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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%
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* As of March 31,2008

8. Accounting Balance Sheet v/s Valuation Balance Sheet
Accounting Balance Sheet Valuation Balance Sheet
INTANGIBLE ASSETS
NET WORKING CAPITAL
NET WORKING CAPITAL
FIXED ASSETS
FIXED ASSETS
MARKET VALUE OF
LONG-TERM DEBT
LONG - TERM
DEBT MARKET VALUE
BOOK VALUE OF EQUITY
OF
EQUITY
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9. Definition and Overview
AS 26(6) of ICAI defines an Intangible Asset as:
“an identifiable non-monetary asset, without physical substance, held for
use in the production or supply of goods or services, for rental to others, or
for administrative purposes.”
IAS 38.8 of International Accounting Standard defines an Intangible Asset
as:
“An identifiable nonmonetary asset without physical substance”
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10. Types of Intangible Assets
Try to name some of the potential intangible assets a business enterprise
may 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
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11. Types of Intangible Assets
Intangible 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
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12. Marketing-Related Assets
Definition
Primarily used in the marketing or promotion of products or services
Types of assets
Trademarks, trade names
Service marks, collective marks, certification marks
Trade dress (unique color, shape, or package design)
Internet domain names
Noncompetition agreements
Most commonly valued assets
Trademarks and trade names
Noncompetition agreements
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13. Marketing-Related Assets
Trademarks
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
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14. Marketing-Related Assets
Trade 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
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15. Marketing-Related Assets
Internet domain name
Unique alphanumeric name that is used to identify a particular Internet address, such as
american-appraisal.com or icai.org
Noncompetition 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
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16. Customer-Related Assets
Definition
Relate to customer structure or customer relationships of the business
Types of assets
Customer lists
Order or production backlog
Customer relationships (contractual and non contractual)
Most commonly valued assets
Customer relationships (contractual and non contractual)
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17. Customer-Related Assets
Customer 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 lists
Order 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 profits
Customer 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
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18. Technology-Based Assets
Definition
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 secrets
Most commonly valued assets
Computer software
Patented and unpatented technology
Databases
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19. Technology-Based Assets
Patented 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 country
Trade 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
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20. Technology-Based Assets
Computer 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.
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21. Contract-Based Assets
Definition
Rights that arise from contractual arrangements
Most commonly valued assets
Licensing and royalty agreements
Lease agreements
Supply contracts
Service contracts
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22. Other Intangible Assets
In 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.
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23. Other Intangible Assets
Goodwill
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 operations
Assembled workforce
Value in avoiding the costs to locate, hire, and train employees
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24. Questions?
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25. Section Two:
Why and How We Value Intangible Assets

26. Agenda
Section Two: Why and How We Value Intangible Assets
Introduction
Valuation Purposes
Valuation Approaches
Tax Benefit of Amortization
Expected Remaining Life
Q&A
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27. Valuation Purposes
Regulatory Compliance
Financial 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
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28. Valuation Purposes
Other 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
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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
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30. Valuation Approaches – Income
Relief 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
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31. Valuation Approaches – Income
Multi-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
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32. Valuation Approaches – Income
Other 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
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33. Valuation Approaches – Cost
Principle of substitution
A buyer would pay no more for an asset than the cost to develop or construct an investment
of equal utility
Cost 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
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34. Valuation Approaches – Cost
Methodologies
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 workmanship
Common applications
Assembled workforce
Internally developed/Internal use software
Engineering drawings
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35. Valuation Approaches – Cost
Required 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 developer's profit
• Percentage return on developer's investment, or
• Fixed Rupee amount
–Entrepreneurial incentive
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36. Valuation Approaches – Cost
Obsolescence - reflects that value is not necessarily equal to the sum of
historical 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
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37. Valuation Approaches - Market
Premise
Based on guideline transactions involving similar intangible assets and similar market
conditions
Common 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
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38. Amortization Tax Benefit
Amortization of acquired intangible assets reduces taxable income and
creates an amortization tax benefit
As 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
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39. Expected Remaining Life
The period over which an asset is expected to contribute to future cash
flows
Expected 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
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40. Questions?
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41. Section Three:
Reconciling the Valuation of Intangible Assets

42. Agenda
Section Three: Reconciling the value of intangible assets
Introduction
Required Rates of Return
Reconciling Value Indications
Q&A
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43. Required Rates of Return
Required rates of return attempt to estimate the return a typical investor
would require
Dependant on perceived risk, liquidity
The weighted average cost of capital or “WACC” is the required return on a
business entity’s invested capital (i.e. equity and debt).
WACC = (% Debt * Kd * (1-Tax Rate)) + (% Equity * Ke)
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44. Required Rates of Return
The 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
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45. Required Rates of Return
The 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%
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46. Required Rates of Return
Established 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 industry
In these instances, the required return can be estimated as a premium to the
WACC or the cost of equity of the company
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47. Required Rates of Return
Development-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 expectations
In these instances the intangible assets are typically 100 percent equity
financed
Venture capital rates of return can be used to approximate return requirements
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48. Contact details
Varun Gupta
Managing Director
American Appraisal India
Mobile: +91 99 6766 4231
Office: +91 22 4070 0123
vgupta@american-appraisal.com
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