Intangible Assets Valuation Best Practices in the US Anthony V. Aaron, ASA, CFA Better Valuation for Better Financial Reporting Bocconi University, Milan Italy 22 June 2011
Agenda Valuation and Appraisal Glossary Valuation and Appraisal Organizations, by Category The Role of Non-Member Organizations The Role of Member Organizations Recently Issued, or Soon to Be Updated, Non- Authoritative Guidance Fair Value Measurement in Financial Accounting FASB Actions on Fair Value Valuation Methods and Techniques Other Matters Speaker Bio Page 2
Valuation and Appraisal Glossary AAA: Appraisal Association of America AACI: Accredited Appraiser Canadian Institute (AIC) ABAR: Accredited in Business Valuation Review (IBA) ABV: Accredited in Business Valuation (AICPA) AI: Appraisal Institute AIC: Appraisal Institute of Canada AICPA: American Institute of Certified Public Accountants AITF: Appraisal Issues Task Force AM: Accredited Member (ASA) APB: Appraisal Practices Board (TAF) AQB: Appraisal Qualifications Board (TAF) ASA: American Society of Appraisers, Accredited Senior Appraiser ASA BVS: ASA Business Valuation Standards ASB: Appraisal Standards Board (TAF) ASFMRA: American Society of Farm Managers and Rural Appraisers AVA: Accredited Valuation Analyst (NACVA) BVAL: Business Valuator Accredited for Litigation (IBA) BVC: Business Valuation Committee of the ASA CBA: Certified Business Appraiser (IBA) CBV: Chartered Business Valuator (CICBV) CFA: Charter Financial Analyst (CFAI) CFAI: CFA Institute CICBV: Canadian Institute of Chartered Business Valuators CRA: Canadian Residential Appraiser (AIC) CVA: Certified Valuation Analyst (NACVA) FRICS: Fellow of The Royal Institution of Chartered Surveyors IAAO: International Association of Assessing Officers IACVA: International Association of Consultants, Valuators and Analysts IBA: Institute of Business Appraisers IEPR: Institutoto de Evaluadores adores de Puerto Rico IIBV: International Institute of Business Valuers IRWA: International Right of Way Association IVS: International Valuation Standards IVSC: International Valuation Standards Council MAI: Member of the Appraisal Institute MBREA: Massachusetts Board of Real Estate Appraisers MRICS: Member of The Royal Institution of Chartered Surveyors NACVA: National Association of Certified Valuers and Analysts NAIFA: National Association of Independent Fee Appraisers RICS: Royal Institution of Chartered Surveyors RICS RV: RICS Registered Valuer SRA: Senior Residential Appraiser (AI) SSVS: Statement of Standards on Valuation Services (AICPA) TAF: The Appraisal Foundation USPAP: Uniform Standards of Appraisal Practice VRG: Valuation Resource Group of the FASB VSC BVC: Valuation Standards Committee of the Business Valuation Committee (ASA) Page 3
Valuation and Appraisal Organizations By Category Non-Member Organizations TAF IVSC IIBV Multi-disciplinary Organizations ASA RICS Business Valuation Only Organizations CICBV AICPA-ABV IBA NACVA IACVA Accounting Standard Setter VRG Real Estate Only Organizations AI AIC AAA ASFMRA IAAO IEPR IRWA MBREA NAIFA Financial Analysts CFAI Voluntary Forums AITF Inter Firm Page 4
The Role of Non-Member Organizations The Appraisal Foundation ( TAF ) Founded in in the United States in 1987 by nine leading appraisal professional organizations As a result of the enactment by the US Congress of the Financial Institutions Reform, Recovery and Enforcement Act ( FIRREA ) in 1989, TAF became the Congressionally authorized source of appraisal standards and qualifications TAF adopted the Uniform Standards of Appraisal Practice ( USPAP ) in 1989 Mandatory adherence to USPAP primarily rests with Real Estate appraisal as it relates to collateral lending in Federally Related Transactions (i.e. those where the lender is Federally Insured USPAP adherence has expanded to other areas, including Office of Management and Budget ( OMB ) requirements for other agencies and through Federal Interagency Appraisal and Evaluation Guideliines. Member of Sponsoring professional organizations, through their voluntary membership in such organizations, agree to comply with USPAP, as a condition of their membership TAF signed the Madison Agreement in 2006 with the IVSC to work together to the achievement of the ultimate goal of a single set of understandable and enforceable global valuation standards Page 5
The Role of Non-Member Organizations (continued) The Appraisal Foundation ( TAF ) (continued) In 2006, TAF implemented the Task Force on Valuations in Financial Reporting ( VFR Task Force ), as a result of collaboration with the Appraisal Issues Task Force ( AITF ), a voluntary thought leadership forum established in the early 2000s. The VFR Task Force has, to date, established three working groups to develop monographs on Best Practices for Valuations in Financial Reporting The Identification of Contributory Assets and Calculation of Economic Rents The Valuation of Customer Related Intangibles in Financial Reporting The Use of Control Premiums in Entity Valuations performed for Financial Reporting The VFR Task Force is considering other topics in addition to the first three (e.g. Contingent Consideration) TAF and the IVSC have agreed to work together to internationalize best practices guidance Upon the establishment of the Appraisal Practices Board ( APB ) on July 1, 2010 by the TAF, the activities of the VFR Task Force and its working groups were placed under the auspices of the APB TAF hosted a Webinair entitled Fair Value Measures In Financial Reporting, Including Mark to Market on 16 March 2011 Page 6
The Role of Member Organizations The American Institute of Certified Public Accountants ( AICPA ) Business Valuation Committee and accreditation ( ABV ) Statement on Standards for Valuation Services (SSVS) Practice Aids related to Business Valuation Other Valuation-related publications Annual National Business Valuation Conference Annual Fair Value Conference Valuation Webcasts Best Practices Task Forces under Financial Reporting Executive Committee ( FinREC ) Assets Acquired to be used on Research and Development Activities (IPR&D Practice Aid) Valuation of Privately-Held-Company Equity Securities to be Issued as Compensation Impairment Page 7
The Role of Member Organizations (Continued) The American Society of Appraisers ( ASA ) Business Valuation Committee and accreditation (ASA and AM) Business Valuation Standards ( BVS ) Educational offerings (Principles of Valuation, including 2 courses on Intangible Assets) Annual International Appraisal Conference Annual Advanced Business Valuation Conference Regional and Local Fair Value Conferences (Los Angeles, San Francisco, New York) Publisher of Business Valuation Review The National Association of Certified Valuation Analysts/The Institute of Business Appraisers ( NACVA/IBA ) Accreditations (CVA, AVA, CFFA, CBA, BVAL, ABAR) NACVA Professional Standards Periodic Conferences Educational Offerings Page 8
Recently Issued, or Soon to be Updated, Non-Authoritative Guidance AICPA IPR&D Practice Aid (originally issued 2001, updated exposure draft available Summer/Fall 2011) (Intangible asset focused) Cheap Stock Practice Aid (originally issued 2004, updated exposure draft available) (Business entity focused) TAF Contributory Assets Monograph and Toolkit (issued May 2010) Page 9 Customer Relationships Monograph (exposure draft available Summer 2011)
Fair Value Measurement in Financial Accounting SFAS 157 Fair Value Measurements (Now ASC 820) issued in 2006 set forth a consistent framework for fair value measurement for financial reporting under US GAAP New Definition of Fair Value, emphasizing Exit Price and Market Participant assumptions Introduced Principal or Most Advantageous market concepts Highest and Best Use concept adopted from appraisal literature Introduced Hierarchy of Inputs, Levels 1, 2 and 3 (observable and un- observable) Confirmed Market, Income and Cost Approaches as being the valuation framework under which various methods and techniques would be applied Updated by ASU 2011-4 Converged with newly issued IFRS 13 Fair Value Measurements Page 10
FASB Actions on Fair Value FASB issued SFAS 157 in late 2006 FASB issued an Invitation to Comment ( ITC ) on Valuation Standard Setting for Financial Reporting in early 2007 Roundtable held in mid-2007 to discuss ITC and comments received Valuation Resource Group created in late 2007/early 2008 to advise FASB Board Members and Staff on Fair Value Measurement issues that impact financial accounting Non-authoritative, not a standard setter or a developer of best practice guidance FASB issues numerous FSPs and ASUs on Fair Value, subsequent to 2006, many relating to the Credit Crisis in the US and the fair value measurement of financial instruments ASU 2011-4, updating ASC 820, issued in 2011 Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs Page 11
Valuation Methods and Techniques for Intangible Assets Market Approach Transaction or Direct Sales Comparison Method Income Approach DCF technique Multi-period Excess Earnings Method ( MPEEM ) Relief from Royalty Method Revenue or Profit Splitting With and Without or incremental methods The Greenfield method Advanced Methods, including Options, Lattice, Monte Carlo, scenario analysis (decision tree), etc. Considerations in approaching income streams from an ROI (asset investment) perspective, versus a functional or activity-oriented perspective (margins on differing elements of a business) e.g. the Distributor Model Cost Approach Replacement Cost Method Reproduction Cost Method Page 12
Other Matters Defensive Intangible Assets Primary Income Generating Assets ( PIGA ) Remaining Useful Life ( RUL ) Stress Testing Prospective Financial Information ( PFI ) Diagnostic Analyses Assembled Workforce and Going Concern considerations Page 13
Speaker Bio Page 14
Anthony V. Aaron, ASA, CFA Valuation and Business Modeling Principal Tony Aaron serves as Americas Leader of Quality and Risk Management ( QRM ) for the Ernst & Young LLP ( EY ) Valuation and Business Modeling ( VBM ) practice, acting as a key liaison between EY s National Office Accounting and Auditing Groups, EY s National Tax Practice and the VBM Practice. Tony also is a member of EY s Americas Ethics Oversight Board. As of January 2011, Tony has relocated from the Southern California area, where he has served clients for EY for over 25 years, to EY s McLean Virginia office, where he will be serving clients in the greater Washington DC Metropolitan area and across the Mid-Atlantic. From a professional practice perspective, Tony has recently been selected to serve a three year term as an at-large member of the Appraisal Foundation s Board of Trustees. He has served, and continues to serve on a number of different task forces, committees, and working groups involved with best practices in Fair Value measurements for financial reporting. He currently co-chairs the AICPA task force which is updating the so-called IPR&D Practice Aid and also recently concluded a three year role as chair of the Appraisal Foundation s Working Group focused on developing best practices for calculating Contributory Asset Charges as they are used in fair value measurements for financial reporting. Tony holds an undergraduate degree in Business Administration from the University of Southern California, and a Masters of Business Administration from the University of California at Los Angeles. He is a Chartered Financial Analyst (CFA) and an Accredited Senior Appraiser (ASA) in Business Valuation with the American Society of Appraisers. He is currently finishing a second term as a member of the Business Valuation Committee of the ASA and serves on the ASA s Business Valuation Standards sub-committee. Prior to his tenure at EY, Tony served several years as Director of Research for an Investment Advisory Firm in the Southern California area, providing securities analysis in support of portfolio management activities. Contact information: anthony.aaron@ey.com Ernst & Young LLP, 8484 Westpark Drive, McLean, VA, 22102, USA 1-703-747-1822 747 1822 Page 15
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