ABV Goodwill & Intangible Asset Valuation 2 — Questions and Answers
Question 1: Which of the following best defines 'assembled workforce' in the context of purchase price allocation?
- A separately recognized intangible asset representing the trained employee base of an acquired company
- The fair value of employment contracts with key management personnel
- A contributory asset used in the MPEEM but not separately recognized under ASC 805 (Correct answer)
- The replacement cost of recruiting and training the existing employee headcount
Correct answer: A contributory asset used in the MPEEM but not separately recognized under ASC 805
Under ASC 805, assembled workforce does not meet the separability or contractual-legal criterion for separate recognition and is therefore treated as a contributory asset in valuation models, not a separately recognized intangible.
Question 2: The 'greenfield method' is most often used to value which category of intangible assets?
- Customer lists acquired in a business combination
- Franchises and long-term supply contracts
- Licenses and operating permits with long remaining terms (Correct answer)
- Marketing-related intangibles such as trade dress
Correct answer: Licenses and operating permits with long remaining terms
The greenfield method models the hypothetical cash flows required to replicate a business from scratch without the subject intangible (e.g., a license or permit), thereby isolating the value of that intangible.
Question 3: When estimating the useful life of a customer relationship intangible, which analytical approach is most commonly used?
- Remaining contractual term of current customer agreements
- Historical customer attrition or churn rate analysis (Correct answer)
- Weighted average cost of capital for the industry
- Replacement cost to re-acquire the customer base
Correct answer: Historical customer attrition or churn rate analysis
Analysts typically use historical customer attrition (churn) data to construct a survival curve, which drives the economic useful life estimate for customer relationship intangibles.
Question 4: Under IRC Section 197, which of the following intangibles must be amortized over 15 years for tax purposes?
- Self-created intangibles developed internally before an acquisition
- Separately acquired patents with a remaining legal life of 10 years
- Goodwill and going-concern value acquired in an asset acquisition (Correct answer)
- Covenants not to compete lasting less than five years
Correct answer: Goodwill and going-concern value acquired in an asset acquisition
IRC Section 197 requires goodwill and going-concern value (along with most other acquired intangibles) in an asset purchase to be amortized straight-line over 15 years regardless of their economic life.
Question 5: Which metric is most commonly used to benchmark royalty rates when applying the relief-from-royalty method to technology intangibles?
- Comparable company EBITDA multiples
- Gross margin differentials between licensed and proprietary products
- Rates observed in arm's-length licensing transactions for similar technologies (Correct answer)
- The subject company's historical return on equity
Correct answer: Rates observed in arm's-length licensing transactions for similar technologies
Market-observable arm's-length royalty rates from comparable licensing agreements (often sourced from databases such as RoyaltySource or ktMINE) provide the primary benchmark for selecting royalty rates.
Question 6: The 'distributor method' is used in purchase price allocation primarily to value:
- Customer relationships when the entity acts as a distributor of third-party products (Correct answer)
- Distribution rights and territorial licenses held by a company
- The trade name when a distribution agreement restricts use of competing brands
- Non-compete agreements with former distributors
Correct answer: Customer relationships when the entity acts as a distributor of third-party products
The distributor method values customer relationships for entities acting as distributors by using profit margins typical of distribution businesses as the starting point, rather than entity-level margins.
Question 7: Which of the following is a key difference between personal goodwill and enterprise (entity) goodwill in a business valuation?
- Personal goodwill is always larger than enterprise goodwill in service businesses
- Enterprise goodwill transfers with the business, whereas personal goodwill is inseparable from an individual (Correct answer)
- Personal goodwill is reported on the balance sheet as a separate intangible asset
- Enterprise goodwill is excluded from purchase price allocations under ASC 805
Correct answer: Enterprise goodwill transfers with the business, whereas personal goodwill is inseparable from an individual
Enterprise goodwill is attached to the business entity and transfers upon sale, while personal goodwill is attributable to a specific individual and does not transfer with the business.
ABV Goodwill & Intangible Asset Valuation 2
Which of the following best defines 'assembled workforce' in the context of purchase price allocation?