Accounting for Goodwill and Other Intangible Assets

CHAPTER 2Initial Measurement of Acquired Intangible Assets

A. Overview of Fair Value Measurement as Applicable to Intangible Assets

The principles used for determining the fair value of intangible assets (as well as many other assets) are found in ASC 820 and in IFRS 13, Fair Value Measurement. These two sets of rules are substantially identical, so although the following discussion is in the context of ASC 820, it applies equally to IFRS 13.

ASC 820 identifies several valuation techniques and requires an entity to select the techniques most appropriate for the circumstances and for which there is sufficient data available for the measurement. The three widely used valuation approaches (under which there are various valuation techniques) are the cost approach, the market approach, and the income approach.¹

All valuation approaches require data (called inputs), such as the quoted price of stock on an exchange or the estimated cash flows from an asset. Inputs used to determine fair values are either derived from market observations or developed internally. If there is an observable market for an asset, there typically will be either a quoted price for the asset or similar asset or a past transaction regarding the asset or similar asset. As an example, the fair value of real estate can be estimated from sales of similar property. However, market observations can take other forms also, such as the royalty rates the market charges to license similar assets. Identifying sufficient ...