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ABV > Chapter 8 > Flashcards

Chapter 8 Flashcards

1
Q

Like all assets, intangible assets can be ______, ________, or _________, and have _______.

A

Owned, transferred, licensed, value

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2
Q

When are intangible assets recognized separately at a fair value in a business combination?

A

When the intangible assets arise from contractual or other legal rights or if they are separable (capable of being sold, transferred, licensed, rented, or exchanged separately from the entity)

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3
Q

What is the definition of an intangible asset?

A

A nonphysical asset such as franchises, trademarks, patents, copyrights, goodwill, equities, mineral rights, securities, and contracts that grant rights and privileges and have value for the owner

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4
Q

What is intangible asset value derived from?

A

Legal rights, intellectual property content, or expected economic benefits which does not reside in the physical elements of the tangible evidence of an intangible asset

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5
Q

Are financial assets intangible assets?

A

Yes, including cash

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6
Q

What are intangible real property assets?

A

Transferable legal interests in tangible real estate (right to use, occupy, extract from, cross over)

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7
Q

What are examples of intangible real property?

A

Leases, occupancy permits, building permits, surface rights, air rights, mining rights, water extraction rights, drilling rights

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8
Q

When does an intangible asset need to be recognized separately from goodwill?

A

If either

1) arises from contractual or other legal rights regardless of whether those rights are transferable from the acquired entity
2) is separable - can be sold, transferred, licensed, rented, or exchanged

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9
Q

What are the 8 general categories for intangible assets?

A

1) technology (patents, software, know how, R&D in process)
2) customer-related (lists, engineering drawings, tech documentation, customer contracts including backlog, non-contractual relationships)
3) contract-related (supplier contracts, tech-sharing, franchise)
4) human-capital related (trained/assembled workforce, noncompetes, employment agreements)
5) marketing-related (advertising, brochures)
6) location-related (leasehold interests, mineral/mining exploration rights)
7) license-related (operational/environmental licenses or permits, pollution control permits)
8) artistic-related (plays, operas, ballets, music, pictures)

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10
Q

If a private company elects ASU 2014-18, what will they be permitted to do?

A

No longer recognize the following separately from goodwill:

  • Customer-related intangible assets unless they are separable
  • Noncompete agreements
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11
Q

What must a company also adopt if they elect ASU 2014-18?

A

ASU 2014-02, the private company alternative to amortizing goodwill

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12
Q

What are 8 reasons a valuation analyst may be asked to analyze the economics of intangible assets?

A

1) Transaction pricing and structuring in connection with a business combination
2) Intercompany use and ownership transfers
3) Financial accounting and reporting
4) Taxation planning and compliance
5) Financing collateralization and securitization
6) Bankruptcy and reorganization
7) Litigation claims and dispute resolution
8) Management information and strategic planning

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13
Q

What are 4 quantitative objectives that should be considered when valuing intangible assets?

A

1) To estimate a defined value associated with the ownership of the subject intangible asset (fair value for financial reporting, fair market value for tax/litigation purposes)
2) To measure the appropriate royalty rate or intercompany transfer price associated with the use of the subject intangible asset
3) To quantify the expected RUL of the ownership or operation of the subject intangible asset or to quantify the associated rate of change in its value
4) To determine the amount of lost profits or other economic damages associated with the subject intangible asset

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14
Q

How are other commercial intangible assets created? (Not intellectual property)

A

In the normal course of business operations

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15
Q

How is IP created?

A

By specific human intellectual capital activity

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16
Q

What does IP in each category share?

A

Similar in nature, feature, method of creation, and legal protection

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17
Q

What are 4 categories of IP?

A

1) Trademark and trade names (including service marks, service names, and trade dress)
2) Patents (including utility, design, and plant patents and the associated patent applications)
3) Copyrights (including musical and literary compositions, other works of art, and copyrights in computer software and engineering drawings)
4) Trade secrets (including processes, designs, diagrams, drawings, schematics, or memoranda)

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18
Q

From what perspective is goodwill typically considered?

A

From a marketplace or transaction perspective

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19
Q

Financial accounting intangible asset valuations are typically ______?

A

Rule-based

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20
Q

Goodwill on the balance sheet does not ______ but can only _______

A

Increase, decrease

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21
Q

What are the three principal components of goodwill value?

A

1) Assemblage factor
2) Excess economic income (profit motive)
3) Expectation of future events

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22
Q

What is the definition of the assemblage factor?

A

The incremental intangible value associated with the fact that the subject business enterprise assets are in place and ready to use

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23
Q

What is assemblage factor sometimes called?

A

Going-concern value element of goodwill

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24
Q

What are the elements of a business enterprise?

A

1) Capital (equipment)
2) Labor (employees)
3) Coordination (management)

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25
Q

The value created by the assemblage factor does what to the value of the business enterprise elements?

A

Enhances the value

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26
Q

What is the definition of excess economic income?

A

Income generated by a business enterprise that is greater than the amount that would be considered a fair rate of return on all of the other tangible and intangible assets that are used in the subject business

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27
Q

Expectation of future events includes what five expectations?

A

1) Future capex and investments
2) R&D activities
3) Future M&A
4) Future products and services
5) New customers or clients

28
Q

What component of goodwill relates to expectation of future events?

A

The definition of goodwill as the current value of future assets not yet in existence as of the valuation date

29
Q

What component of goodwill relates to assemblage of value?

A

Going-concern value element of goodwill

30
Q

What component of goodwill relates to excess economic income?

A

The value of a business enterprise that cannot be assigned to any of the other tangible assets or identified intangible assets of the subject business

31
Q

What three approaches are generally accepted for valuing intangible assets?

A

Market, cost, and income approaches

32
Q

What are the steps for the market approach to value an intangible asset?

A

1) Select objective criteria (sales level) and subjective criteria (business description) for determining the comparability between guideline intangible assets involved in arm-length sale/license transactions and the subject
2) Survey appropriate secondary market and select a sample of guideline transactions
3) Estimate value after review and analysis of guideline transactions

33
Q

What subjective criteria may be included to determine the comparability between the subject and guideline transactions involving intangible assets?

A

1) type of subject intangible asset
2) use of asset
3) subject owner/operator industry
4) size of owner/operator
5) term of license agreement
6) de novo (new) license agreement versus seasoned license agreement
7) de novo intangible asset versus seasoned intangible asset

34
Q

The relief from royalty method involves which two approaches?

A

Market and income

35
Q

What is the relief from royalty method commonly used for?

A

Valuing trademarks and trade names

36
Q

What is the theory behind the relief from royalty method?

A

Owning an intangible asset relieves the owner from having to pay license fees to a third party for a similar asset

37
Q

What are royalty rates generally stated as a percentage of?

A

Revenue

38
Q

What is the value of an intangible asset under the relief of royalty method?

A

The present value of forgone license fees that would have been paid for the asset

39
Q

What are three methods under the cost approach for valuing intangible assets?

A

1) replacement cost new less depreciation
2) reproduction cost new less depreciation
3) trended historical cost less depreciation

40
Q

How is profit margin handled by some valuation analysts in the cost approach for intangible assets?

A

A reasonable profit margin should be included to reflect the profit a developer would expect in an exchange transaction

41
Q

What types of intangible assets are frequently valued under the cost approach?

A

Assembled workforce, internally developed tech and software, and freely available licenses

42
Q

What is the objective of the cost approach to valuing intangible assets?

A

To quantify the cost to create a substitute in terms of functionality, utility, owner/operator usefulness, and profitability during its remaining economic useful life

43
Q

Under the income approach, what is the value of an intangible asset based on?

A

The portion of the economic income of the business associated with the ownership or use of the intangible asset

44
Q

What measures can be used to represent intangible asset income?

A

Net/gross profit margin, return on investment (investment as total assets, net assets, or owners’ equity), and the present value of future operating cash flow (before or after tax, before or after debt service)

45
Q

What does the economic income of the business represent when valuing an intangible asset under the income approach?

A

1) incremental income
2) excess or residual income or
3) a profit split of total income associated with the asset

46
Q

What income approach methods can be used to value an intangible asset?

A

Capitalization or DCF

47
Q

What is a with and without method to value an intangible asset under the income approach?

A

Captures the incremental benefit of the earnings measured with the subject intangible assets in place over earnings measured without the asset

48
Q

When valuing contractual and non-contractual customer relationships what method should be considered?

A

Multi-period excess earnings method

49
Q

What is the multi-period excess earnings method?

A

Measures economic benefits by calculating the cash flow attributable to an asset after deducting appropriate returns for contributory assets used by the business in generating the customer-related asset’s revenue and earnings

50
Q

When does the multi-period excess earnings method work best?

A

When the subject is a primary asset or the primary asset can be easily valued using another method

51
Q

What treatment is required under FASB ASC 740 as it relates to the cost assigned to an acquired intangible asset?

A

The cost should be the same whether it is acquired piecemeal which would result in a tax basis and corresponding tax benefit from amortization of the purchase price of the assets under IRC sections 167 or 197 or in a nontaxable business combination in which the asset had no corresponding tax basis

52
Q

What do IRC sections 167 and 197 allow?

A

Amortization deduction for the capitalized costs of amortizable intangible assets and prohibition of any other depreciation or amortization with respect to the property

53
Q

What is the amortization deduction under IRC section 197?

A

Amortized ratably over 15 year period

54
Q

What intangible assets fall under IRC section 197?

A

Most intangible assets

55
Q

What is the amortization deduction under IRC section 167?

A

Amortized basis ratably over the economic life of the asset or a 15 year period

56
Q

What intangible assets fall under IRC section 167?

A

Certain software and artistic-related IP

57
Q

How should a valuation analyst handle tax attributes?

A

It may be appropriate to include the income tax attributes in the measurement of value measured by calculating a tax amortization shield or benefit factor (the present value of future taxes avoided due to amortization)

58
Q

How is the estimation of RUL of intangible assets done in the income approach?

A

A lifing analysis is performed to estimate the annual attrition rate during the PFI period used to determine how long the economic benefits may be realized

59
Q

How is the estimation of RUL of intangible assets done in the cost approach?

A

A lifing analysis is performed to estimate obsolescence in existence

60
Q

How is the estimation of RUL of intangible assets done in the market approach?

A

A lifing analysis is performed t select, reject, or make adjustments to guideline sales or license transactions

61
Q

A longer RUL results in a ________ intangible asset value?

A

Greater

62
Q

Under the market approach, the secondary market should do what with respect to RUL for the subject intangible asset?

A

Indicate acceptance. If different, adjustments may be needed or if significantly different, a DLOM may be necessary due to lack of market demand for the subject characteristics

63
Q

What is RUL?

A

Remaining useful life

64
Q

What 8 factors should be considered when estimating RUL for an intangible asset?

A

1) physical life
2) functional life
3) technological life
4) economic life
5) contract life
6) statutory or judicial life
7) legal or regulatory life
8) actuarial mortality life

65
Q

When considering the 8 factors when estimating RUL for an intangible asset, which one should be used?

A

The shortest of the alternative RUL measures

ABV (9 decks)

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