Fair Value Measurement: Practical Guidance and Implementation, 2nd Edition

CHAPTER NINE

Advanced Valuation Methods for Measuring the Fair Value of Intangible Assets

Best practices for measuring the fair value of intangible assets continue to evolve. Professional organizations such as the American Institute of Certified Public Accountants (AICPA), the American Society of Appraisers, and the Appraisal Foundation have taken the lead in providing best practice guidance. The guidance extends to fair value measurement of intangible assets in financial reporting. Because of the unique nature of intangible assets, advanced financial theory can be applied to their fair value measurement.

Advanced valuation techniques such as option-pricing methods, Monte Carlo simulations, and decision tree analysis are becoming more accepted as reliable tools for measuring the value of intangible assets. These methods may also be useful in measuring the fair value of contingent assets, contingent liabilities, and contingent consideration in a business combination. The purpose of this chapter is to explain several advanced methods for estimating fair value, particularly those methods that can be used in measuring the fair value of certain identified intangible assets.

LIMITATIONS OF TRADITIONAL VALUATION METHODS

Previous chapters describe traditional valuation methods under the cost, market, and income approaches that are commonly used to measure the fair value of intangible assets in financial reporting. Although each of these methods is theoretically sound and widely accepted, ...