Structuring the Intangible Asset Analysis Assignment

The standard 10 stages to use in an intangible asset engagement

In this second installment, Robert F. Reilly completes his review of the 10 typical stages of any intangible asset analysis engagement. For purposes of this article, an intangible asset analysis may include a valuation, damages analysis, transfer price study, or other economic analysis. The business appraiser will typically consider these stages, or elements, before, during, and after performing any quantitative or qualitative analyses.

Damage Analysis Report

Consider Applicable Professional Standards 

The business appraiser should consider if there are any professional standards that apply to the development of the analysis, the reporting of the analysis results, or both.  The extent to which certain professional standards apply to the subject analysis is a function of both (1) the type of intangible asset analysis, and (2) the type of intangible asset appraiser. For example, different standards may apply to a valuation engagement, economic damages engagement, transfer price study, or other type of intangible asset analysis.  And, different standards may apply, for example, to a certified public accountant (CPA) compared to a non-CPA performing the same analysis.

CPAs who perform intangible asset valuations will comply with the AICPA Statement on Standards for Valuation Services (SSVS).  CPAs who perform intangible asset damages analyses will comply with the AICPA Statement on Standards for Consulting Services (SSCS).  And, CPAs who perform intangible asset transfer price analyses for income tax purposes will comply with the AICPA Statement on Standards for Tax Services (SSTS). 

Members of various professional organizations also perform intangible asset valuation services.  Such business appraisers will comply with the professional standards promulgated by the organizations of which they are members.  For example, the American Society of Appraisers (ASA), the Institute of Business Appraisers (IBA), and the National Association of Certified Valuators and Analysts (NACVA) all have professional standards that may apply to intangible asset valuations. The Uniform Standards of Professional Appraisal Practice (USPAP) contains standards rules that relate to intangible asset appraisals.  Certain intangible asset appraisers will comply with USPAP when such compliance is required by either (1) law, (2) regulation, or (3) an agreement with the appraiser’s client.

Nonetheless, there are no all-embracing professional standards with which all business appraisers should comply with regard to intangible asset valuations.  For example, economists, academics, industry analysts, licensing executives, or financial planners who perform intangible asset valuations do not need to comply with any of the above-mentioned professional standards. The same statement is true with respect to intangible asset damages analyses.  Other than AICPA professional standards and practice aids that apply to CPAs, there are no other economic damages professional standards that apply to non-CPA analysts.  Likewise, there are no promulgated professional standards for other intangible asset analyses such as exchange ratio measures, license royalty rate studies, remaining useful life (RUL) and amortization studies, etc. All business appraisers who perform intercompany transfer pricing studies for income tax purposes will comply with the procedural guidelines listed in the Treasury Regulations related to Internal Revenue Code Section 482.  However, there are also no professional standards related to intangible asset transfer price analyses.

The above discussion relates specifically to promulgated professional standards.  The lack of standards for certain types of analyses and for certain types of appraisers should not imply that there are not best practices related to all intangible asset analyses.  These best practices are incorporated in generally accepted professional practices and procedures.  However, these best practices may not be documented in written professional standards.  Nonetheless, any business appraiser should be prepared to justify a departure from the generally accepted professional practices with respect to any individual intangible asset analysis. 

As mentioned above, there are evidentiary requirements related to any intangible asset analysis performed for litigation purposes.  Such requirements involve whether the judicial finder of fact will accept the business appraiser’s expert report and expert testimony as evidence in the particular proceeding.  These rules of evidence vary between the various federal courts, between federal and state courts, and between the various state courts.  Business appraisers should obtain legal instructions from the client’s counsel regarding (1) the applicable rules of evidence, and (2) the appraiser’s compliance with the applicable rules of evidence.

Assemble and Supervise Appropriately Trained Staff

Unless the subject analysis is particularly simple, it is not uncommon for a supervisory appraiser to assemble and work with a team of intangible asset appraisers.  In such instances, the supervisory appraiser is usually the individual (1) who has overall responsibility for the engagement, (2) who will reach the final value, damages, transfer price, etc. conclusion, and (3) who will sign the analysis written report and/or deliver the analysis oral report.

In such cases, the supervisory appraiser should ensure that all members of the engagement team:

1. Have adequate experience and expertise to work on the analysis
2. Are adequately trained and supervised throughout the engagement
3. Have a sufficient understanding of the elements of the assignment
4. Have a sufficient understanding of the assignment time and fee budget
5. Have a sufficient understanding of the assignment deliverables
6. Have a sufficient understanding of the analysis documentation requirements

Of course, the supervisory appraiser should ensure that each team member understands his or her role in the preparation of the analysis development and of the analysis report.

Collect and Confirm Sufficient Data to Perform the Analysis

Whether or not the business appraiser has a team of assistants, the appraiser is ultimately responsible for the adequacy of the data collection and due diligence procedures. In most types of intangible asset analyses, the business appraiser may collect and synthesize five categories of data:

1. Owner/operator documents—including a description of the owner/operator, a description of the use of the intangible asset, historical financial statements, and prospective financial statements
2. Intangible asset data—including information about the intangible asset age, original development, maintenance activities, current use in the owner/operator business operations, and expected future use in the owner/operator business operations
3. Subject transaction documents—including documents related to an ownership, transfer, license, financing, pending litigation, or any other event that is the subject of the intangible asset analysis
4. Industry data—including information about the industry that the owner/operator competes in and about any industry that can (or does) use the subject intangible asset
5. Comparable transaction data—including data regarding comparable companies to the owner/operator, sales of comparable intangible assets, and licenses of comparable intangible assets

Select and Perform the Appropriate Analysis Methodology

The experienced business appraiser is aware that there are generally accepted methods and procedures related to each type of intangible asset analysis.  That is, there are generally accepted methods and procedures related to intangible asset valuations, damages measures, transfer price studies, and other analyses.  In each particular analysis, the business appraiser will apply the most appropriate methods based on:

1. The quantity and quality of available data
2. The purpose and objective of the analysis
3. The specific factors related to the subject intangible asset
4. The specific factors related to the subject intangible asset transaction
5. The analyst’s perception of the methods used by actual market participants

Ultimately, the business appraiser will rely on his or her reasoned judgment and professional experience in the selection of the appropriate analysis methods.  Relying on that judgment and experience, the appraiser should be prepared to explain the reasoning for (1) accepting the analysis methods that were used, and (2) rejecting the analysis methods that were not used.  In addition, the appraiser should be prepared to explain any departures from the generally accepted methods and procedures that are applicable to the subject analysis.  In particular, the appraiser should expect to explain any such departures in an intangible asset analysis prepared for litigation purposes.

Reach a Replicable and Well-Supported Analysis Conclusion 

The synthesis and conclusion of any intangible asset analysis is ultimately the responsibility of the principal appraiser.  Like the selection and application of the analysis methods, reaching the final analysis conclusion is ultimately a matter of the business appraiser’s judgment and experience.

In reaching a final analysis conclusion, the business appraiser will consider if there are any applicable regulatory considerations.  For example, the conclusion of an intangible asset royalty rate is usually based on a synthesis of the results of several royalty rate estimation methods. However, the conclusion of an intangible asset intercompany transfer price is typically based on the result of a single analysis method.  This is because the regulations related to Internal Revenue Code Section 482 require the appraiser to apply the so-called Best Method Rule. That is, the appraiser will select and apply the most appropriate of the allowable transfer price methods.  And, then the final transfer price conclusion is based on the application of that single best method.

Typically, the business appraiser will consider all indications from all methods in synthesizing the final analysis conclusion.  The appraiser will typically reconcile all of the analysis indications to reach a weighted average overall conclusion. Some appraisers prefer to use a qualitative weighted average procedure, assigning a specific weighting percentage to (say) the method A conclusion versus the method B conclusion versus the method C conclusion.  Other appraisers prefer to assign a more qualitative weighting to the various analysis indications. For example, without specifying percentages, the appraiser may apply (say) the most weight to the method A conclusion, less weight to the method B conclusion, and the least weight to the method C conclusion.

Regardless of the reconciliation procedure used, the business appraiser’s objective is to make the subject analysis conclusion as replicable and as transparent as possible.  That way, another appraiser can duplicate (and verify) the appraiser’s reasoning and conclusion.  Also, a replicable, transparent conclusion is usually more convincing to the business appraiser’s client, the client’s legal counsel, the finder of fact, or any other interested party.

Prepare a Well-Documented and Well-Reasoned Analysis Report

In preparing a report (written or oral) that is meaningful to the client and to other interested parties, the business appraiser will consider if the report complies with the assignment requirements.  In particular, the appraiser will consider if the analysis and the report achieve both the purpose and objective of the assignment. In particular, the appraiser will consider if the report complies with:

1. Any applicable professional standards (including any litigation-related requirements)
2. The terms and conditions of the engagement letter or engagement memo
3. The informational needs of the client (or any other interested parties)

For intangible asset analyses prepared for litigation or related purposes, the business appraiser will consider if the report work product complies with all applicable litigation, taxation, regulatory, or other requirements.  If the business appraiser is not absolutely sure of the appropriate requirements, then he or she should consult with the client’s legal counsel.

Summary and Conclusion

There are normally ten stages to most intangible asset analyses.  These ten stages are typically applicable to an intangible asset valuation, damages analyses, transfer price study, or other type of analysis.  In performing the intangible asset analysis, the business appraiser will:

1. Understand the assignment purpose and objective
2. Conclude the intangible asset HABU
3. Document the assignment elements in an engagement letter or memo
4. Consider the appropriate report form and format
5. Apply any applicable professional standards
6. Train and supervise the engagement team       
7. Collect and confirm sufficient data
8. Select and perform the appropriate methodology
9. Reach a well-supported analysis conclusion
10. Prepare a well-documented analysis report

The effective structuring of the intangible asset analysis assignment should result in (1) the efficient development of the analysis, and (2) the clear reporting of a well-supported analysis conclusion. 

This article was originally published in the Second Quarter 2013 issue of Business Appraisal Practice.

[author] [author_image timthumb=’on’]http://www.willamette.com/our_people/images/r_reilly.jpg[/author_image] [author_info]Robert F. Reilly, CFA, ASA, CPA, CBA, is a managing director in the Chicago office of Willamette Management Associates, a valuation consulting, economic analysis, and financial advisory services firm.  Mr. Reilly can be reached at rfreilly@willamette.com.[/author_info] [/author]