Intellectual property valuations

Intellectual Property Valuations

At Lotus Amity we provide intangible asset and intellectual property valuations. Examples of the types of intangible asset we value include:

Marketing assets – such as trademarks, trade names and marketing materials
Customer assets – such as customer lists and customer contracts
Artistic assets – the rights to benefits from artistic assets such as books and films
Contract assets – the right from contracts, such as licensing, royalties, supply and lease agreements
Technology assets – the right to use for example technology, databases, process and software

Reasons for Intellectual Property Valuations

We prepare intangible asset and intellectual property valuations for a range of reasons, these reasons include:

Financial reporting – Per AASB 138, an acquired intangible assets is recognised if certain criteria are met and recorded at fair value
Stamp duty – certain regulatory bodies, for example the Queensland Government, distinguish between business assets like goodwill and intellectual property for duty purposes
Tax – a cost base maybe required for restructuring purposes and to calculate the effective life of the asset for amortisation purposes
Legal & litigation – intellectual property values are sometimes required in shareholder, transaction and family disputes or in compulsory purchases

Intellection Property Valuations approach

When we value intellectual property and intangible assets we follow the International Valuation Standards. As per the standards we follow the three valuation approaches:

Income approach – The income approach is the most common method applied to value intangible assets and intellectual property and is frequently used to value technology, customer-related intangibles, trade names and brands and operating licenses. Under this approach we model future cash flows and discounts rates.
Market approach – The market approach is applied when there is information available on arm’s length transactions involving identical or similar assets and sufficient information is available to allow for adjustments between the subject and similar assets
Cost approach – Under the cost approach, the intellectual property valuation is determined based on the replacement cost of a similar asset or an asset providing similar service potential or utility. The approach is commonly used for intellectual property such as internally developed and internally used, non-marketable software

Intellectual Property Valuations methods

Under the income approach, the specific valuation methods we adopt to value intangible assets and intellectual property include:

Excess earnings method – We model and calculate the present value of the expected future cash flows attributable to the asset after excluding the proportion of the cash flows that are attributable to other assets, Contributory Assets, required to generate the cash flows
Relief-from-royalty method – We estimate the value by modelling the hypothetical future royalty payments that will be saved through owning the asset, as compared with licensing the intangible asset from a third party
With-and-Without Method – We model and discount expected future cash flows in two scenarios: one in which the business uses the intellectual property and one in which the business does not use the intellectual property, all other factors remaining constant

Discount rates, asset life and tax amortisation benefit

Other than modelling future expected cash flows, other key issues in valuing intangible assets and intellectual property include modelling a discount rate, establishing the expected life of the asset and calculating the tax amortisation benefit.

When assessing these issues, matters we consider include:

The risk-free rate, cost of debt and equity for the expected life of the asset using a weighted-average-cost-of-capital (WACC) for the company and or implied internal rates of returns implied by the acquisition of the intellectual property
Performing a weighted-average-return-on-assets (WARA) analysis to confirm the reasonableness of the selected discount rate
To estimate the useful life, asses the pattern of use and likely replacement, attrition rates, and legal, functional and technology factors
When using an income valuation approach, we estimate the value of the tax amortisation benefit by modelling and discounting the expected future tax benefit

Intangible Asset and Intellectual Property Valuations Experience

Examples of previous intangible asset and intellectual property valuations include:

The valuation of management advisory and promoter agreements and the brand associated with the acquisition of a large superannuation service provider. The valuation was provided as part of the purchase price allocation report for financial report purposes, per AASB 3 Business Combinations and AASB 138 Intangible Assets. The agreements were valued using the Excess-Earnings-Method and the brand using the Relief-from-Royalty Method. Under the Excess-Earnings-Method, future revenues were estimated for the agreements, contributory assets were identified and measured (including the assembled workforce), a return on the contributory assets was estimated and deducted, and an appropriate cost of capital estimated and used to calculate the present value.
The valuation of process automation and software applications developed within the construction industry. Process automation included customer service, logging jobs, reporting and project management, resulting in cost savings and the ability to respond quickly to disaster related work. The valuation report was for the ATO to determine the cost base for a related party transfer. The report adopted the With-and-Without Method and the Relief-from-Royalty Method and estimated the expected economic life of the applications. Under the With-and-Without Method estimated future revenue, revenue growth and profit margines were compared with and without the applications and discounted back using an estimated cost of capital. Under the Relief-from-Royalty Method a royalty rate was developed, using observed royalty agreements, and applied to revenue projections.
The valuation of the brand and internally developed documents associated with an end-to-end encrypted messaging service application and digital asset tokens. The valuation was provided for tax purposes in relation to a proposed international restructure. The brand was valued using the Relief-from-Royalty method and the documents using the Replacement Cost Method.

Resources

Useful resources in relation to intangible asset and intellectual property valuations include: