ASA Intangible Asset Valuation 2 — Questions and Answers
Question 1: Which valuation approach is most appropriate for valuing a patent on a new pharmaceutical compound?
- Cost approach using replacement cost new less depreciation
- Market approach using comparable patent license transactions
- Income approach using discounted expected future royalties or profits (Correct answer)
- Net asset value approach based on R&D expenditures
Correct answer: Income approach using discounted expected future royalties or profits
The income approach is most appropriate for pharmaceutical patents because it captures the expected future economic benefits — royalties or product profits — discounted at a risk-adjusted rate.
Question 2: The economic useful life of an intangible asset is best defined as:
- The statutory or legal life of the asset as granted by law
- The period over which the asset is expected to contribute to future cash flows (Correct answer)
- The amortization period assigned by the accountant for tax purposes
- The remaining contractual term of the licensing agreement
Correct answer: The period over which the asset is expected to contribute to future cash flows
Economic useful life is the period during which an asset is expected to contribute to future cash flows, which may differ from its legal or contractual life.
Question 3: Customer attrition rates are most directly used in valuing which intangible asset?
- Trade names
- Developed technology
- Customer relationships (Correct answer)
- Non-compete agreements
Correct answer: Customer relationships
Customer attrition rates determine how quickly an existing customer base erodes over time, making them central to modeling the revenue decay used to value customer relationships.
Question 4: In a purchase price allocation, which accounting standard requires acquirers to recognize intangible assets separately from goodwill if they meet the contractual-legal or separability criteria?
- ASC 350
- ASC 805 (Correct answer)
- ASC 820
- ASC 360
Correct answer: ASC 805
ASC 805 (Business Combinations) requires acquirers to identify and measure all identifiable intangible assets separately from goodwill at their fair values on the acquisition date.
Question 5: The 'greenfield method' in intangible asset valuation is most commonly used for:
- Customer relationships with long-term contractual terms
- Concession arrangements or licenses to operate a business (Correct answer)
- Assembled workforce valuation in a startup context
- Trade secret valuation in a regulated industry
Correct answer: Concession arrangements or licenses to operate a business
The greenfield method values an intangible, typically a license or concession, by modeling the cash flows of a hypothetical business built entirely from scratch that must first obtain the subject intangible.
Question 6: When valuing trade names using the relief-from-royalty method, the royalty rate is typically applied to:
- Operating income
- Net income after tax
- Revenues (Correct answer)
- Earnings before interest and taxes (EBIT)
Correct answer: Revenues
In the relief-from-royalty method, royalty rates for trade names are applied to revenues because licensing agreements for brand names are conventionally structured as a percentage of sales.
Question 7: Non-compete agreements are most commonly valued using:
- The relief-from-royalty method applied to projected revenues
- The lost profits or with-and-without method (Correct answer)
- The multi-period excess earnings method (MPEEM)
- The replacement cost method based on training expenditures
Correct answer: The lost profits or with-and-without method
Non-compete agreements are valued by estimating the income the company would lose if the individual were free to compete — a direct application of the with-and-without or lost profits approach.
ASA Intangible Asset Valuation 2
Which valuation approach is most appropriate for valuing a patent on a new pharmaceutical compound?