OF INTANGIBLE INTERESTS – INTERNATIONAL NOTE
The International Valuation Standards Committee (IVSC) adopted this
Guidance Note (GN) to improve the consistency and quality of
intangible asset valuations among the international community
the benefit of users of financial statements and users of intangible
Intangible asset valuations are commonly sought and performed on the
Market Value basis of valuation applying the provisions of
International Valuation Standard 1 (IVS 1). Where other bases of
valuation are used with proper explanation and disclosure, the
provisions of IVS 2 are applied.
In general, the concepts, processes, and methods applied in the
valuation of intangible assets are the same as those for other types
terms may have different meanings or uses. Those differences become
important disclosures wherever they are used. This GN sets forth
important definitions used in valuations of intangible assets.
1.4 Care should be taken
by Valuers and users of valuation services to distinguish between the
value of individual, identifiable intangible assets and going concern
considerations, including those encountered in the valuation of real
property interests. An example of the latter is valuations of property
with trading potential.
This GN is provided to assist in the course of rendering or using
valuations of intangible assets.
In addition to the elements that are common to other GNs to the
International Valuation Standards, this GN contains a more expansive
discussion of the intangible asset valuation process. This is
typify what is commonly involved in valuations of intangible assets
and to provide a basis of comparison with other types of valuations,
discussion should not be considered as either mandatory or limiting
except as provided in this GN or otherwise in the IVS.
2.3 Because other basic
valuation principles, the International Valuation Standards, and
Guidance Notes are also applicable to valuations of intangible assets,
this GN should be understood to incorporate all other applicable
portions of the IVS.
With respect to assets, the capitalised cost of an asset less
accumulated depreciation, depletion, or amortisation as it appears on
the account books of the business.
3.1.2 With respect to a
business entity, the difference between total assets (net of
depreciation, depletion, and amortisation) and total liabilities of a
business as they appear on the balance sheet. In this case, book
value is synonymous with net book value, net worth,
and shareholder’s equity.
3.2 Business Entity. A
commercial, industrial, or service organisation pursuing an economic
At a given date, the conversion into the equivalent capital value
of net income or a series of net receipts, actual or estimated, over
In business valuation, the term refers to the capital structure
of a business of a business entity.
In business valuation, this term also refers to the recognition
of an expenditure as a capital asset rather than a periodic expense.
Capitalisation Factor. Any multiple or divisor used to convert
income into value.
Rate. Any divisor (usually expressed as a percentage) that is used
to convert income into value.
Gross Cash Flow. Net income after
taxes, plus noncash items such as depreciation and amortisation.
Net Cash Flow. During an operating period, that amount of cash
that remains after all cash needs of the business have been
satisfied. Net cash flow is typically defined as being cash
available to equity or invested capital.
Equity Net Cash Flow. Net income after taxes, plus depreciation
and other non-cash charges, less increases in working capital, less
capital expenditures, less decreases in invested capital debt
principal, plus increases in invested capital debt principal.
3.6.4 Invested Capital
Net Cash Flow. Equity net cash flow, plus interest payments net of
tax adjustment, less net increases in debt principal.
Discount Rate. A rate of return used to convert a monetary
sum, payable or receivable in the future, into present value. A
weighted average of the discount rate applied to intangibles and the
applied to tangibles should correlate with the weighted average cost
of capital for the business.
3.8 Economic Life. The
period over which property may be profitably used. Economic life may
vary by State depending on the level of industrial development and
regulatory atmosphere in each State.
3.9 Effective Date. The
date at which the Valuer’s opinion of value applies (also referred to
as Valuation Date, and/or As Of Date).
3.10 Enterprise. See
Going Concern. An operating business.
entity is normally viewed as a going concern, that is, as continuing
in operation for the foreseeable future. It is assumed that the
entity has neither the intention nor the necessity of liquidation or
of curtailing materially the scale of its operations (IAS 1, 23-24,
Going Concern Value
3.12.1 The value of a
business, or of an interest therein, as a going concern.
3.12.2 Intangible elements
of value in an operating business resulting from factors such as having
a trained work force, an operational plant, and the necessary licenses,
systems, and procedures in place.
Future economic benefits arising from assets that are not capable
of being individually identified and separately recognised (IFRS 3,
Personal Goodwill.The value of profit over and above market
expectations, which would be extinguished upon sale of the
specialised trading property, together with those financial factors
related specifically to the current operator of the business, such as
taxation, depreciation policy, borrowing costs and the capital
invested in the business.
Transferable Goodwill. That intangible asset that arises as a
result of property-specific name and reputation, customer patronage,
location, products, and similar factors, which generate economic
benefits. It is inherent to the specialised trading property, and
will transfer to a new owner on sale.
Income Capitalisation Approach. A general way of estimating a
value indication of an intangible asset using one or more methods
wherein a value is estimated by converting anticipated benefits into
Intangible Assets. Assets that manifest themselves by their
economic properties. They do not have physical substance; they grant
rights and privileges to their owner and usually generate income for
owner. Intangible Assets can be categorised as arising from Rights,
Relationships, Grouped Intangibles, or Intellectual Property.
Rights exist according to the terms of a contract, written or
unwritten, that is of economic benefit to the parties. Examples are
supply contracts, distribution contracts, providing contracts, and
permits, among others.
Relationships between parties are normally noncontractual, can
be short-lived, and can have great value to the parties. Examples are
assembled workforce, customer relationships, supplier relationships,
distributor relationships, and structural relationships between
parties, among others.
Grouped Intangibles are the residual intangible asset value
left after all identifiable intangible assets have been valued
and deducted from total intangible asset value. Alternative
concepts include patronage, excess earnings, and residual value.
Grouped intangibles are often called goodwill. Goodwill
has, at various times, been said to be the tendency for customers
to return to a place of business, the extra income generated by a
business over and above a fair return to the identified assets,
and/or the extra value of the entity as a whole over and above the
aggregate value of its constituent identifiable assets.
Property is a special classification of intangible assets because
it is usually protected by law from unauthorised use by others.
Examples are brand names, or tradenames; copyrights; patents;
trademarks; trade secrets, or know-how; among others.
3.15.5 In general, the
accounting profession limits the recognition of individual intangible
assets to those that are commonly recognisable, have a statutory
or contractual remaining life, and/or must be individually transferable
and separable from the business.
Property. The rights and privileges granted to the owner of
Legal Life. The life of the intangible assets allowed by
3.18 Market Approach. A
general way of estimating a value indication for an intangible asset
using one or more methods that compare the subject to similar assets
that have been sold.
3.19 Market Value. See
IVS 1, para. 3.1.
Rate of Return. An amount of income (loss) and/or change in
value realised or anticipated on an investment, expressed as a
3.21 Replacement Cost
New. The current cost of a similar new item having the nearest
equivalent utility as the item being appraised.
3.22 Report Date. The
date of the Valuation Report. May be the same as or different from the
3.23 Reproduction Cost
New. The current cost of an identical new item.
Approach. In general, a way of estimating value using one or more
specific valuation methods. (See Asset Based Approach, Market Approach,
and Income Capitalisation Approach definitions).
3.25 Valuation Method. Within
valuation approaches, a specific way to estimate a value.
Procedure. The act, manner, and technique of performing the steps
of a valuation method.
3.27 Valuation Ratio. A
factor wherein a value or price serves as the numerator and financial,
operating, or physical data serve as the denominator.
3.28 Value in Use. This
value type focuses on the value that specific property contributes to
the entity of which it is a part without regard to the property’s highest
and best use or the monetary amount that might be realised upon
its sale. Value in use is the value a specific property has for a
specific use to a specific user and is, therefore, non-market related.
Relationship to Accounting Standards
Intangible asset valuations are commonly used as a basis for making
allocations of value for various assets to aid in the establishment
or restatement of financial statements. In this context, Intangible
Asset Valuers reflect the Market Value of all components of a
business’s balance sheet in order to meet accounting Standards,
having regard to the convention that reflects the effect of changing
International Accounting Standard 38 (IAS 38)
the accounting treatment for intangible assets, discusses the
criteria an intangible asset must meet for recognition, specifies the
carrying amount of intangible assets, and sets forth requirements for
disclosures about intangible assets.
Valuations of intangible assets may be required for a number of
possible uses including acquisitions and dispositions of businesses
or parts of businesses, mergers, sale of an intangible asset,
financial reporting and the like.
5.1.1 Where the purpose of
the valuation requires a Market Value estimate, the Valuer
shall apply definitions, processes, and methodologies consistent with
their provision in IVS 1.
5.1.2 When an engagement
calls for a value basis other than Market Value, the Valuer
shall clearly identify the type of value involved, define such value,
and take steps necessary to distinguish the value estimate from a Market
If, in the opinion of the Valuer, certain aspects of an engagement
indicate that a departure from any provision of the International
Valuation Standards or of this GN is necessary and appropriate, such
departure should be considered for disclosure along with the reason
for invoking the departure.
The Valuer shall take steps to assure that all data sources relied on
are reliable and appropriate to the valuation undertaking. In many
instances it will be beyond the scope of the Valuer’s services to
perform a complete verification of secondary or tertiary data
the Valuer shall verify the accuracy and reasonableness of data
sources as are customary in the markets and locale of the valuation.
Valuers of intangible assets must frequently rely on information
received from a client or from a client’s representatives. The
source of any such data relied upon must be cited by the Valuer in
oral or written reports, and the data shall be reasonably verified
wherever possible. The requirements for Valuation Reports are
addressed in the IVS Code of Conduct (section 7.), and IVS
5.5 Although many of
the principles, methods, and techniques of intangible asset valuation
are similar to those used in other fields of valuation, valuations of
intangible assets require special education, training, skills, and
A description of the valuation assignment must include
identification of the intangible asset(s), or the ownership
interest in the intangible asset(s), to be valued;
the effective date of the valuation;
the definition of value;
the owner of the interest; and
the purpose and use of the valuation.
Factors to be considered by the Intangible Asset Valuer include:
The rights, privileges, or conditions that attach to the
Ownership rights are set forth in various legal documents. In
various States, or in some legal jurisdictions, these documents may
be called patents, trademarks, brands, know-how, databases, and
copyrights, to name a few.
Whoever owns the interest is bound by the documents that record
such interest in the intangible assets. There may be rights and
conditions contained in an agreement or exchange of correspondence,
and these rights may or may not be transferable to a new owner of the
Remaining economic life and/or legal life of the intangible asset
The earnings capacity of the intangible assets
5.7.4 The nature and
history of the intangible assets.
value resides in the benefits of future ownership, history is
valuable in that it may give a guide to the expectations of the
for the future.
The economic outlook that may affect the subject intangible assets,
including political outlook and government policy. Matters such as
the exchange rate and inflation and interest rates may affect
intangible assets that operate in different sectors of the economy
The condition and outlook of the specific industry, which may
affect the subject intangible assets.
5.7.7 Intangible value may
also be contained in undifferentiated assets, often called goodwill.
that goodwill value in this context is similar to goodwill in the
accounting sense in that both are the residual value (historical cost
in accounting terms) after all other assets have been taken into
Prior transactions in ownership interests of the subject
Other market data, e.g., rates of return on alternative
The market prices for acquisition of similar intangible assets
interests or intangible assets.
Often, particularly in the use of acquisition transactions,
adequate information is difficult or impossible to obtain. While the
actual transaction price may be known, the Valuer may not know what
warranties and indemnities were given by the seller, what terms were
given or received, or what impact taxation planning had on the
Comparable data should always be used with care, and numerous
adjustments may need to be made.
Adjustment of historical financial statements to estimate the
economic abilities of and prospects for the intangible assets
5.7.12 Any other
information the Valuer believes to be relevant.
Intangible asset valuation approaches
Market (sales comparison) approach to intangible asset
The market approach compares the subject to similar
intangible assets or intangible asset ownership interests and
securities that have been sold in the open market.
The two most common sources of data used in the market
approach are markets in which ownership interests of similar
intangible assets are traded and prior transactions in the ownership
of the subject intangible assets.
There must be a reasonable basis for comparison with and reliance
upon the similar intangible assets in the market approach. These
similar intangible assets should be in the same industry as the
subject or in an industry that responds to the same economic
variables. The comparison must be made in a meaningful manner and
must not be misleading.
Through analysis of acquisitions of intangible assets, the Valuer
often computes valuation ratios, which are usually price divided by
some measure of income or net assets. Care must be used in
calculating and selecting these ratios.
The ratio(s) selected must provide meaningful information about
the value of the intangible assets.
The data on the similar intangible assets used to compute the
ratio must be accurate.
The calculation of ratios must be accurate.
If the data are averaged, the time period considered and the
averaging method must be appropriate.
All calculations must be done in the same way for both the
similar intangible assets and the subject intangible assets.
The price data used in the ratio(s) must be valid as of the
valuation date and representative of the market at that time.
Where appropriate, adjustments may need to be made to render the
similar intangible assets and the subject intangibleassets more
Adjustments may need to be made for unusual, non-recurring, and
The selected ratios must be appropriate given the differences in
risk and expectations of the similar intangible assets and the
subject intangible assets.
Several value indications may be calculated since several
valuation multiples may be selected and applied to the subject
When prior transactions in the subject intangible assets are used
to provide valuation guidance, adjustments may need to be made for
the passage of time and for changed circumstances in the economy, the
industry, and the intangible assets.
Income capitalisation approach to intangible asset valuation.
18.104.22.168 The income
approach estimates the value of an intangible asset or of
intangible asset ownership interests by calculating the present value
of anticipated benefits.
two most common income approach methods are (direct)
capitalisation of income and discounted cash flow analysis
In (direct) capitalisation of income, a representative
income level is divided by a capitalisation rate or multiplied by an
income multiple (capitalisation factor) to convert the income into
Income is typically allocated to the various intangible assets by
must be taken so that the income allocated to all of the individual
assets does not exceed the income available to all assets.
In theory, income can consist of a variety of types of income and
cash flow. In practice, the income measure is usually pre-tax income
or post-tax income. If the capitalisation methods are used, the
economic life of the assets must be infinite, or very long.
In DCF analysis and/or dividend method, cash
receipts are estimated for each of several future periods.
receipts are converted to value by the application of a discount
rate, using present value techniques. Many definitions of cash
flow could be used.
methods are most commonly used for intangible assets with finite
economic lives. The time period covered by the discounting methods is
normally the shorter of the economic life or the legal life (the
definable period over which the asset or interest therein is legally
Economic life is measured as the period when the intangible
assets can be expected to give the owner an economic return on the
assets. An example is computer software that may have an expected life
of 36 months before it is necessary to replace it with an updated
Legal life is measured as the period when the intangible asset
can be protected by law. An example is a patent that has a definable
life at its inception and that slowly, over time, goes to zero.
Capitalisation rates and discount rates are derived from the
market and are expressed as price multiples (derived from data on
publicly traded businesses or transactions) or an interest rate
from data on alternative investments).
Anticipated income or benefits are converted to value using
calculations that consider the expected growth and timing of the
benefits, the risk associated with the benefit stream, and the time
value of money.
Cost approach, often called the cost to recreate, the cost
approach is also known as the adjusted asset approach.
A cost-based approach is founded on the Principle of
Substitution, i.e., an asset is worth no more than it would cost to
all of its constituent parts.
In the execution of the cost approach, the cost of each item in
the creation of the assets, including developer’s profit, must be
estimated using the knowledge possessed as of the valuation date.
The value conclusion shall be based upon
the definition of value, and
all relevant information as of the valuation date necessary in
view of the scope of the assignment.
The value conclusion shall also be based on value indications from
the valuation methods performed.
The selection of and reliance on the appropriate approaches,
methods, and procedures depend on the judgment of the Valuer.
The Valuer must use judgment when determining the relative weight
to be given to each of the value indications derived during
application of the Valuation Process. The Valuer should provide the
rationale and justification for the valuation methods used and for
the weighting of the methods relied on in reaching the reconciled
6.1 This International
Valuation Guidance Note became effective 31 January 2005.