This three-part article discusses the valuation of intangible assets in Family Law cases. Part I covered business combination accounting, intangible asset attributes and categories, and the valuation assignment and analysis. Part II will discuss valuation approaches and methodologies (cost, market, income). Part III will turn to income and cost approach examples, common databases and errors to avoid.
INTANGIBLE ASSET VALUATION APPROACHES AND METHODS
There are three generally accepted intangible asset valuation approaches: the cost approach, the market approach, and the income approach. There are a number of generally accepted valuation methods within each intangible asset valuation approach. Each of the methods within an approach are based on common economic principles. There are a number of valuation procedures that are used to apply each intangible asset valuation method. The valuation procedures are performed in order for the analyst to select and apply the individual valuation variables needed to complete the valuation method.
A description of the generally accepted intangible asset valuation approaches and methods is beyond the scope of this discussion. However, the following table provides a list of the generally accepted intangible asset valuation approaches and methods.
The analyst typically considers all generally accepted valuation approaches and methods in the valuation of each intangible asset for either acquisition accounting or family law purposes. As recommended in the MPF, the analyst should document the thought process related to the selection of--and the rejection of--each valuation approach and method selected (or not selected). The analyst should document that selection (and rejection) criterion both in the work papers and in the valuation report.
COST APPROACH VALUATION CONSIDERATIONS
In both acquisition accounting and family law valuations, some intangible assets lend themselves to cost approach valuation analyses. The following intangible asset cost approach considerations should be documented in both the work papers and the valuation report.
All cost approach methods include both a current cost measurement and a depreciation measurement. The analyst should explain and document considerations of the following four cost components in the cost approach analysis:
* Direct costs (including direct materials and direct labor)
* Indirect costs (including development-related overhead and administrative expenses)
* Developer's profit (on the sum of the direct costs and the indirect costs)
* Entrepreneurial incentive (that is, the opportunity cost--or the owner/operator's lost income--during the intangible asset estimated replacement period)
The analyst should also explain and document considerations of the following three depreciation components in the cost approach analysis:
* Physical depreciation (not a significant factor in most intangible asset valuations)
* Functional/technological obsolescence (where the analyst considers the intangible asset's estimated UEL)
* Economic/external obsolescence (where the analyst considers the intangible asset owner/operator's return on investment--or ROI--related to the intangible asset cost approach value indication)
In both acquisition accounting and family law valuations, the analyst should explain and document his or her application of the following cost approach valuation formula:
Current cost measurement
less: Physical depreciation (if any) less: Functional obsolescence
less: Technological obsolescence (if quantified separately from functional obsolescence)
less: Economic obsolescence (a component of external obsolescence)
equals: Intangible asset fair value...