Testing the Financial Return Selected for the Intangible Assets

One of the major characteristics of intangible assets recognized in generally accepted accounting principles is the characteristic of identifiably. Based on an analysis of the business and discussions with management, the valuer determines that an identifiable intangible asset exists in the form of intellectual property. The valuer obtains data demonstrating the existence of this asset, and performs an analysis relying in part on an estimate of the remaining useful life of the intellectual property. The intellectual property alone could be sold to a willing buyer and such a sale would not necessarily require a transaction involving the entire business. 

Let's assume a business has a discount rate of 17%. This rate is theoretically the weighted average return on all the assets of the enterprise. We have determined that the discount rate applicable to this particular intellectual property is 16%.

Assuming a total business value of $7,500,000, a detailed financial return allocation study might yield the following:

                                                             FMV           Return

Cash & Equivalents                            $700,000           5.0%
Accounts Receivable-Trade                   400,000           7.0%
Prepaid and Other Expenses                100,000            7.5%
Net Fixed Assets                                 800,000            8.0%
Intellectual Property                           3,000,000          16.0%
Goodwill                                           2,500,000           26.4%

Total and Weighted Average Return   $7,500,000           17.0%

The above analysis can be performed as a reasonableness check to make sure discount rates used to value intellectual property are supportable and make sense in the context of the business overall.

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