FRS 10 in the UK allows acquired intangibles to be valued FAS.141 in the US requires a purchase price to be allocated to acquired assets including intangibles and FAS 142 demands intangible impairment reviews. 

Goodwill and other intangible assets are no longer subject to amortization, they must be tested at least annually for impairment or on an interim basis when there is reason to suspect that values have diminished.  Testing is done through the application of commonly used valuation methodology.  Non-goodwill indefinite lived assets are to be tested first.

There is a lot more emphasis on pre-acquisition analysis with valuers asked to look at transactions prior to consummation of the deal.

International Accounting Standards will be commonplace soon and concerning intellectual property they are mostly similar (e.g. legal right but but not economic right) to the new US standards.

In addition, the developing International Financial Reporting Standards (IFRS) being promulgated by the IASB (International Accounting Standards Board) may afford further, new opportunities.  For instance, the new requirements (IFRS 2) that companies expense stock-based compensation - such as stock options - will require the valuation of the stock/options.  In the U.S., this is also emerging as a requirement (SFAS 123, Amended).  Read also the note in Employment above

We understand the auditor perspective, for example PwC in respect of our work for Prudential over the years as that of the SEC in many other appraisals.

Auditors are particularly interested in scruitinising purchase price methodology.  For example they look at what kind of internal rate of return has been used to make forecasts of earnings in relation to the purchase price.

We advise clients to use as many valuation methods as allowed to give them flexibility, typically market and comparability study, discounted cashflow and market

capitalisation.  If only one method is chosen, there is a danger of having an impairment charge, even though there has been no real change to the underlying business.

The Purchase Cost Allocation summary at our NewsDesk contains more detail.

Broadly the implementation process can be summarised by five phases; identification and due-diligence, analysis of purchase price, testing of purchase price, determination of the type of acquired asset and determine their value.

The fair values of working and identified tangible and intangible assets are subtracted from the purchase price and the residual represents acquired goodwill value.

If fair values exceed the purchase price they are reduced on a pro-rata basis to the purchase price.  In that case, no goodwill exists.

The standards can be vague and confusing.  We are continually evaluating practices and promulgations.  When we can we will provide clarity to the area of business combinations at our NewsDesk.

Greater convergence then but internally generated intangibles are yet again not treated with the respect they deserve. If you are unhappy about this the Operating Financial Review document, compulsory soon for all UK listed companies, will, for all IPR, be the place be seen.

The smartest companies, including unquoted or quoted will as usual accompany the annual report with a supplement with intangibles information and valuation. In surveys it has been shown that those who report in this way are more likely to receive upbeat views from analysts.

Conceptually there is no difference to a creditor or shareholder whether IPR was purchased or developed in house. In either case they have value because they generate future cashflows. Why should accounting treatment differ.