Dear Eugenio,

for a context-specific (transfer pricing) overview see  the OECD's "Guidance on Transfer Pricing Aspects of Intangibles" (Section D). ISSN:2313-2612 (online). - Link below.

The OECD provides guidance for various situations and methodologies (including some basic examples). It may not be more than a startig-point, but maybe it is wothwhile for you to take a look at it.

Kind regards

Oliver

LINK: http://www.oecd-ilibrary.org/taxation/guidance-on-transfer-pricing-aspects-of-intangibles_9789264219212-en

The present value of the expected after-tax cash flow from the asset taking into account whether the cost of the asset is deductible in arriving at the taxable income from the asset. In the U.S. generally the cost of the intangible can be amortized over 15 years.

Its' very interesting but subjective question to measure intangible. Mostly rough estimate is done based on market perceptions. However, a new technique is used by experts called ROMI (return on marketing investment) to calculate the intangible assets.

First accounting position of intangible assets is not homogeneous. Depending on the character of intangible assets there are different methodologies to determine the value. Different approaches to estimating the value of intangible assets that are self-made and different ones that were purchased on the market. Position goodwill represents the value that you paid above book value when take over company. If we talk about internal goodwill that is a problem and means that you should estimate how much you invested in creating brand. In many cases, this assessment is based on the accounting estimate, and in principle dependent on a lot of managers and accountants objectivity.

You can use measur CE (Customer equity). It is present value of ustomer portfolio. Value of customer portfolio is a best measure of intangible asset.

In Accounting Standards Codification 805 (Business Combinations), the Financial Accounting Standards Board (http://asc.fasb.org)) offers five broad classes of intangible assets that meet accounting standards for balance-sheet recognition apart from Goodwill. Those five are 'marketing-related' (ASC 805-20-55-14), 'customer-related' (ASC 805-2055-20), artistic-related (ASC 805-20-55-29), 'contract-based' (ASC 805-20-55-31), and 'technology-based' (ASC 805-20-55-38). Unfortunately--in my view--these intangibles are recognized only when one company buys another. Goodwill itself is the 'residual'--what remains after quantifying all of the tangible and above intangible assets and then subtracting the total of them from the purchase price.

In part, this set of accounting standards resulted from the Enron collapse late in 2001. The U.S. Securities and Exchange Commission said to FASB, in essence, "No more Enrons." Something called 'fair value accounting' (ASC 820)--in which what a company pays for a long-lived or financial asset might well be not what that asset is recognized on the buyer's balance sheet--was one result. ASC 805, an early version of which had taken effect on July 1, 2001, was another. One wonders what those at FASB were smoking. Whatever it was, I doubt that it's sold in cigarette machines. It is a textbook case of the mischief that can result when 65 really, really smart people have too much time on their hands.

Making the computations for the various types of intangibles that are contained in these five broad classes is not for the faint of heart. . .or the uninitiated. There are different methods for valuing different intangibles. In particular, the multi-period excess earnings methods (a.k.a. MPEEM) can spin the typical professional's head around several full revolutions. That's only a slight exaggeration, believe me. It is accounting at a level and in a way that few financial professionals and professors could have imagined even ten years ago. It's the hardest work we do in our shop--highly abstract and extraordinarily difficult. . .and, to my knowledge, it's not being taught in college accounting or financial courses yet.

Those who want to know more should contact me directly via [email protected]. There is a substantial regulatory and professional literature related to this subject that time, space, and common sense preclude me from elaborating upon, but I'd be happy to hear from and/or help individuals who are interested in pursuing this topic further.

Goodwill usually arises during business combination/acquisition (take overs) and it is the seller (acquiree) who puts up purchase price of particular equity (obviously this is set at highest possible price). The acquirer through consultants can gauge whether it is worth paying the price demanded by acquiree. Goodwill arise where the purchase price is higher than value of the percentage of the net assets acquired. How desperate is the buyer? If very desperate, it is likely that goodwill be high.

In short, there is no rocket science in matters involving goodwill. Its negotiation skills which matter most.

@Brian: Your post is not precisely correct. Under today's accounting rules, whether US GAAP or IFRS, when the purchase price exceeds the fair value of the net assets acquired, there is intangible value, of which goodwill is presumed to be a part. However, the value of goodwill cannot be determined until the other intangibles have been recognized on the balance sheet. At that point, then the excess of the purchase consideration minus the fair value of the net intangible and tangible assets is assumed to be goodwill. Of course, the 'assembled work force, though subsumed in goodwill for accounting purposes, must be valued separately because it is a 'contributory asset'. Contributory assets reduce the amount recognized for an intangible whose value is quantified using the multi-period excess earnings method (MPEEM).

Many thanks Warren. IAS 38 is IFRS for Intangible Assets which sets out stringent criterion for recognizing intangible assets other than purchased goodwill (the said IFRS strictly prohibits recognition of internally generated goodwill). Purchased goodwill is covered under Revised IFRS 3. My comment was purely based on Revised IFRS 3 and it allows an acquirer to choose between partial or full goodwill. My earlier comment was more on partial goodwill while full goodwill allows acquirer to recognize a portion of goodwill attributable to the subsidiary on proportionate basis i.e. if acquirer has recognized goodwill of $100,000.00 in a subsidiary which it hold 80%, then acquirer could recognize 20/80 x $100,000.00 = $25,000.00 as goodwill attributable to non-controlling interest and therefore total goodwill would be $125,000.00. Negotiations would still be crucial to how much more can acquirer pay above the perceived assets of the acquiree.

I'll defer to your knowledge of IFRS, Brian. I know more than I should know about it, but I have no doubt that your knowledge trumps mine. What I know arises in the context of performing purchase price allocations under Accounting Standards Codification (a.k.a. GAAP) 805 (Business Combinations). I suspect that the my usage of this stuff may differ from yours.

Still, even under IFRS, if a buy-side client asks you or me what the quarterly amortization charge for intangible assets is likely to be--so that the client can factor that number into its dealings with analysts who follow a public company and want 'earnings guidance'--you will still need to inject IAS 38 into your work, won't you?

Many thanks Warren. IAS 38 intends to limit creation of false intangible assets. Therefore all intangible assets must be disclosed in the notes of financial statements and for intangible assets with defined life span are amortized over the useful life with full disclosures in the notes. However for intangible considered to have indefinite life span are not amortized but subjected to annual impairment review / test based IAS 36 - Impairment Losses.

HI,

You could have look to this paper:

R Peters, L Taylor, " Intangible capital and the investment Q-relation", Journal of Financial Economics 2016, Forthcoming

Best regards

Dear Eugenio,

Please refer to the works of Prof. Lev Baruch from the New York University, one of the leading scholars of accounting and valuation of intangible assets: http://www.stern.nyu.edu/faculty/bio/baruch-lev

Your can find his papers and books on his personal webpage: http://people.stern.nyu.edu/blev/papers-.html

Paul