Valuation of intellectual properties, other intangible assets, and goodwill

Valuation of intangible assets has become a significant portion of many valuation practices. Although the need to value identifiable intangible assets such as brand, intellectual property, customer relationships and non-compete agreements has been driven by the constantly evolving Canadian, U.S. and international financial accounting standards, valuators are still called upon to perform stand-alone valuations of intangible assets for tax and litigation purposes.

Reilly& Schweihs (Valuing Intangible Assets, McGraw-Hill, 1999) provide a common categorization of intangible assets follows:

  • Marketing-Related
  • Technology-Related
  • Artistic-Related
  • Data Processing-Related
  • Engineering-Related
  • Customer-Related
  • Contract-Related
  • Human Capital-Related
  • Location-Related
  • Goodwill-related


– Trademarks and service marks
– Trade names
– Brand names
– Logos
– Domain names


– Process patents
– Patent applications
– Technical documentation (e.g., laboratory notebooks, technical know-how)


– Literary works and copyrights
– Musical compositions
– Copyrights
– Maps
– Engravings

Data Processing-Related

– Proprietary computer software
– Software copyrights
– Automated databases
– Integrated circuit masks and masters


– Industrial designs
– Product patents
– Trade secrets
– Engineering drawings and schematics
– Blueprints
– Proprietary documentation


– Customer lists
– Customer contracts
– Customer relationships
– Open purchase orders


– Favorable supplier contracts
– License agreements
– Franchise agreements
– Noncompete agreements

Human Capital-Related

– Trained and assembled workforce
– Employment Agreements
– Union contracts


– Leasehold interests
– Mineral exploitation rights
– Easements
– Air rights
– Water rights


– Institutional goodwill
– Professional practice goodwill
– Personal goodwill of a professional
– Celebrity goodwill
– General business going-concern value

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The Financial Accounting Standards Board (FASB) Accounting Standard Codification 350 (ASC 350) defines an intangible asset as an asset, other than a financial asset, that lacks physical substance. International Accounting Standards Board (IASB) standard 38 (IAS 38) defines an intangible asset as: “an identifiable non-monetary asset without physical substance.“

The lack of physical substance would therefore seem to be a defining characteristic of an intangible asset. Both the FASB and IASB definitions specifically preclude monetary assets in their definition of an intangible asset. Intellectual Properties (IPs):

  • are the specialized classification of intangible assets
  • represent all of the legal existence and economic value attributes of other intangible assets
    enjoy special legal recognition and protection
  • are created by human intellectual and/or inspirational activity
  • are generally registered under, and protected by, specific Federal and State / Provincial statutes

There are four types of intellectual property


The most common types of patents are:

  • Patents related to the use of mechanical, electrical, or chemical inventions and covering processes
  • machines, articles of manufacture, or composition of matters, as well as improvements of the same
  • Patents related to design or aesthetic or ornamental appearance of articles of manufacture
  • Patents related to new and distinct discovered or produced plants, which excludes others from making, using or selling the plant for a period of time


Copyrights can include items such as literary or musical works, motion pictures or computer programs. Conceptually, damages suffered due to copyright infringement are the same as those suffered in a patent infringement. However, given the nature of the items that are copyrighted, it may be difficult to quantify the lost revenues from the use of the plaintiff’s copyright. If damages cannot be calculated with adequate precision, the court may award nominal damages. The most common types of copyrights include the following:

  • Literary
  • Musical
  • Dramatic
  • Pantomimes and choreographic
  • Pictorial, graphic and sculptural
  • Motion pictures and other audiovisual
  • Sound recording
  • Computer programs


A trademark is defined as:

  • a mark that is used by a person for the purpose of distinguishing or so as to distinguish wares or services manufactured, sold, leased, hired or performed by him from those manufactured, sold, leased, hired or performed by others
  • a certification mark
  • a distinguishing guise
  • a proposed trade-mark.

Examples of trademarks include:

  • A business or product name
  • A business or product logo
  • A product appearance including size, shape, colour or a combination thereof

Trade Secrets

Protected trade secrets include knowledge of proprietary manufacturing processes, chemical formulae, marketing plans, and certain kinds of information concerning customers. The purpose of trade secrets is to provide:

  • Protection or creation of a strong market position
  • An economic advantage, such as reduced costs and time
  • A barrier to competitive entry

Examples of trade secrets that have been considered by courts include:

  • Price and cost data
  • Production processes
  • Customer lists
  • Databases
  • Computer programs
  • Computer program algorithms
  • Secret chemical formulae

Business Valuators may be asked to perform intellectual property valuations for the following reasons:

  • Financial reporting: purchase price allocation, goodwill and intangible assets impairment testing:
  1. Purchase Price Allocation (Business Combination) – In performing purchase price allocations for financial statement presentation purposes, the acquired assets and assumed liabilities of the acquired business are measured and recorded at their estimated fair value — at the date of the acquisition. This includes intangible assets such as customer lists, trademarks, patents, works of art, etc. Business valuators may be required to value the acquired entity as a whole and then assist in the allocation through the valuation of these intangibles.
  2. Goodwill and Intangible Assets Impairment Testing – Valuators assist in the preparation of financial statements by establishing the initial reported book value of acquired goodwill — based on the residual purchase price not allocated to tangible net assets or identifiable intangible assets — and its allocation to the appropriate reporting units or cash generating units. Valuators also assist in the reallocation of value to identifiable intangibles (if required) and annual impairment testing.
  • Financing, loan collateral or securitization
  • Income tax accounting: value of a contribution from an owner to a company or of a distribution from a company to an owner, a charitable contribution, gift or estate, compensation paid (IP), basis of transferred assets in partnership
  • Transaction, merger, contribution to joint venture, acquisition and fairness opinion
  • Litigation (infringement damage, contract breach, marital dissolution, anticompetitive behaviour and attorney malpractice)
  • Transfer pricing
  • Licensing and royalty rate decisions
  • Bankruptcy and reorganisation analysis: post-bankruptcy fresh start accounting, value of debt collateral, reasonably equivalent value of assets transferred into or out of the bankruptcy estate, fairness of the price of a bankruptcy estate asset sale, and debtor solvency or insolvency analysis
  • Fairness of transaction price: between any two arm’s-length parties, between a parent corporation and a less-than-wholly-owned subsidiary, and between a for-profit entity and a not-for-profit entity