Separating intangibles
from goodwill

IFRS 3, business combinations, was issued on March 31 2004, with associated revisions on IAS 36, asset impairment, and IAS 38, intangible assets.

Traditionally, local accounting standards in most European jurisdictions allowed any excess purchase price over the fair values of existing net assets to be reported as goodwill. Many intangible assets were therefore subsumed within goodwill.

The new standards require the identification and reporting of all acquired intangible assets at fair values, irrespective of whether these assets have been recognised by the target company before the acquisition date.

The standards require the identification and recognition of intangible assets separate from goodwill if they are either contractual or separable.

The valuation of intangible assets can be complex due to a lack of an active market for identical assets in most instances. Companies having to determine the fair value of assets such as customer relationships, trademarks, or even patented technology, often turn to professional valuation consulting firms for assistance.

The excess earnings method is widely used in the valuation of technology-based or customer-related intangible assets. It captures the future expected earnings attributable to a single asset category, after all required returns or economic rents have been paid out, to reflect the use of other assets that contribute to earnings. These contributory assets generally include working capital, fixed assets and other intangibles.

The relief from royalty method - also referred to as the royalty savings method - quantifies the royalty savings enjoyed by the owner by having the right to use the subject intangible asset, as opposed to licensing it from third parties. Market transactions where similar assets are licensed, and the subject asset's contribution to profitability, are key determinants in choosing an appropriate royalty rate. This method is often used in the valuation of brands, trademarks or patents.

The premium pricing method is also appropriate in valuing brands, especially in the consumer products sector, where a branded product commands a higher price than an unbranded equivalent.

The cost savings method, which captures the present value of the cost savings that a company expects to enjoy as a result of owning an asset, is a useful method in valuing intangible assets such as proprietary technology or know-how.

The market approach, a reliable method in valuing businesses and tangible assets, proves to be less useful in valuing intangible assets. It is generally difficult to find publicly available information on sales of same or similar assets.

The cost approach would aim to capture all required efforts in order to recreate the subject asset. Any direct and indirect costs to be incurred to replace the same asset should be considered under this approach. However, one must carefully analyse the appropriateness of this method as historical costs or experiences may not necessarily reflect a proper measure of replacement cost.

Sarpel Ustunel is a director at valuation consulting firm Globalview Advisors