Intangible Assets and Goodwill PDF

CO RPO RAT E F I N A N C E
Intangible Assets and

Goodwill in the context of
Business Combinations
An industry study
ADVI SO RY
Table of contents
About this study 4
Introduction 5
Aim, approach and methodology
Aim 8
Approach and methodology 9
Executive Summary
Overview of allocation of purchase price to goodwill –
industry observations 10
Overview of allocation of purchase price to intangible assets –
industry observations 14
Mapping of business combinations in accounting
General framework 18
Identification of intangible assets 20
Valuation of intangible assets 22
Empirical results: Intangible assets by industry and category
Automotive 24
Building & Construction 28
Chemicals 32
Computer & Semiconductors 36
Consumer Products & Services 40
Energy & Power Generation 46
Entertainment & Media 50
Financial Services 56
Industrial Products 60
Internet & E-Commerce 64
Life Science & Healthcare 68
Software 74
Telecommunications 78
Transportation & Logistics 82
Conclusion 88
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4 Intangible Assets and Goodwill in the context of Business Combinations
About this study
Recent years have been characterised by continuously high M&A activity with
business combinations offering companies a way of increasing and stabilising their
earnings. As a result, businesses have sold at high prices. However, as well as oppor
tunities, acquisitions have also presented risks. As an accounting consequence of
their purchases, many companies have recognised high values of intangible assets,
such as customer relationships, technology, brands and goodwill on their balance
sheets. In some cases, these values even exceeded the amount of equity. For these
purchasers there will be a significant negative impact on earnings in future periods
due to the scheduled amortisation of intangible assets arising from their acquisitions.
Furthermore, there is a possibility that any goodwill arising from the business combi
nation may be considered impaired in future periods, with the associated impairment
charge reducing earnings further. Any appraisal of the likely future negative effect
on earnings and potential impairment risks faced by a company considering an acqui
sition requires a sound understanding of the financial mapping of business combina
tions. Besides ensuring consistency with the relevant accounting regulations, the
identification and valuation of the intangible assets acquired as part of a transaction
are the key processes that a purchaser must go through.
The results of this study provide an idea of the key intangible assets that have under
pinned the value of acquired companies over recent years and of how these asset
types differ depending on the industry being analysed. Our results also provide an
insight into which share of the purchase price for an acquired company is allocated
to identified intangible assets or to goodwill and how this allocation differs between
industries.
This study is intended to provide a guideline for personnel within the accounting and
tax divisions of companies who are responsible for determining and reporting the
financial impact of an acquisition. Our study also highlights several important consid
erations for the management team in relation to the future effects a potential
acquisition may have on their business, including the future impact on earnings due
to the amortisation of acquired intangible assets and potential impairment charges.
Furthermore, our findings will be of interest to external parties analysing a business’s
financial reporting who wish to further understand the implications of acquisitions,
as well as auditors who must approve a company’s financial reporting and disclosure
in relation to any acquisitions it makes.
Munich, May 2009
Dr. Marc Castedello Christian Klingbeil

Partner Partner
Introduction 5
Introduction
The financial mapping of business com Medimmune Inc. for approximately

binations within the US GAAP and IFRS 15.7 billion U.S. dollars in 2007, the IFRS
accounting frameworks has changed balance sheet of AstraZeneca PLC rec
considerably since the introduction of ognised almost 8.1 billion U.S. dollars of
SFAS 141 in 2001, and IFRS 3 in conjunc acquired intangible assets and 8.8 billion
tion with IAS 38 in 2004. A key develop U.S. dollars goodwill. Likewise, after
ment has been the compulsory appli the acquisition of the Pfizer Consumer
cation of the purchase method (which Healthcare business for a purchase price
has now been renamed “acquisition amounting to 16.6 billion U.S. dollars,
method” in IFRS 3 revised), which Johnson & Johnson’s US GAAP 2007
requires a buyer to account for all pur Annual Report disclosed acquired intan
chased assets and assumed liabilities gible assets of 8.8 billion U.S. dollars
and contingent liabilities on a fair value (including R&D-projects with a fair value
basis. These acquired assets and of 217 million U.S. dollars) and goodwill
liabilities are valued as at the date of amounting to 6.5 billion U.S. dollars.
acquisition, which is considered to be After the acquisition of the internet video
the date at which effective control of portal YouTube in 2006 Google disclosed
in the 2006 US GAAP Annual Report
177 million U.S. dollars of acquired intan
According to the purchase
gible assets and a goodwill amounting
(“acquisition”) method intangible
to 1.1 billion U.S. dollars. A recent study
assets like brands, patents,
performed by Handelsblatt dated Octo
customer relationships or tech
ber 8th, 2008, focusing on 127 German
nologies have to be measured
companies within the capital market,
at their fair value.
highlights the importance of intangible
assets. For 26.8% of all companies
the target is obtained. Consequently, an
acquiring company must disclose not
The goodwill impairment risk
only assets already recognised on the
is considered to be relatively low
target’s balance sheet, but also previ
in a phase of strong economic
ously unrecognised intangible assets
growth.
acquired as part of the transaction,
such as company and product brands,
patents, technologies or research and analysed, the value of the goodwill ac
development projects, which have to counted for more than 50% of the com
be fair valued for the first time. pany’s equity. For 17.3% of the compa
nies the ratio of goodwill to fixed assets
The recent high volume of transactions exceeded 50%. The high portion of
has strongly affected the balance sheets
1) See Handelsblatt No. 195 from 8 October 2008,
of companies reporting under US GAAP
Handelsblatt Firmencheck “Altlasten bedrohen
and IFRS. For example, after purchasing deutsche Firmen”, page 1
goodwill is also one of the key results and the valuation of intangible assets
that is reflected by this study. This may represent a big challenge for the acquir
be due to discretionary decisions that ing company as well as the target
allow to allocate purchase price rather company. Typically, due to their unique
towards goodwill than intangible assets, characteristics, the market price for
as this affects the amortisation charge intangible assets cannot be determined.
which will be spread over the remaining In practice, the fair value to be attributed
useful economic life of the acquired is therefore mainly determined by in
intangible assets and thus negatively im come oriented valuation methods. In this
pact earnings. This effect may be a approach, the value of an asset is esti
concern for company management hop mated as the present value of the future
ing to report improved earnings within cash flows generated by the asset as at
the enlarged company after a business the date of acquisition (or “the valuation
combination. In terms of unanticipated date”), which accrue to the acquiring
effects on earnings, the risk of goodwill company over the asset’s remaining use
impairment is often smaller than that ful economic life or, if applicable, from
associated with the amortisation of in the disposal of the asset. As part of this
tangible assets, especially during times methodology, data such as the useful
of strong economic growth. Across all economical life or future expected
industries, the percentage allocation spreads have to be determined and, with
of a purchase price to intangible assets each industry having its own competition
has generally been less than that allo structure, principles and value drivers,
cated to goodwill. This trend might industry specific knowledge is vital.
well be driven by the less stringent dis
closure requirements associated with
For the valuation of intangible
goodwill recognition compared to other
assets knowledge about the
intangible assets and as part of an at
competition structure, principles
tempt to avoid a significant future nega
and value drivers as well as indus
tive earnings impact resulting from
try specific knowledge is vital.
the amortisation of intangible assets.
However, this strategy is now being
scrutinised as the reduced amortisation Since the introduction of the acquisition
charge resulting from a lower allocation method, there have been numerous
of value to intangible assets must be examples of its application within the
weighed against the heightened risk of marketplace and companies can use this
goodwill impairment, especially during information to understand the potential
times of slow or negative economic accounting implications of any acquisi
growth. tions they are planning. However, such
analysis should be applied with caution,
Irrespective of any accounting policy as each transaction is unique and the
reasons, the identification process allocation of the purchase consideration
Introduction 7
Example: Allocation of purchase price on intangible assets and goodwill
PPE and working capital: 50
Technologies: 50
Total step-ups to
Purchase price: 600 fair values: 300
Trade name / brands: 150
– Equity: 200 Excess purchase
– Historic Goodwill price: 400
Deferred
Customer Relationships: 50 Taxes: 90
Residual
Goodwill: 190
to intangible assets will not necessarily accounting (“Deutsche Prüfstelle für between 2003 and 2007. It includes both
be consistent with precedent transac Rechnungslegung DPR e.V.”) as well publicly released and privately held infor
tions from the industry. In addition, as investors and analysts are likely to use mation.
although the intangible assets identified precedent transactions within the indus
try as a benchmark and may well ques It should be highlighted that the results
tion any differences between these of our analysis reflect only the general
The percentage allocation of pur
and the acquiring company’s reporting trend within an industry and should not
chase price to goodwill is indus
of its acquisition. be applied to any one specific transac
try-specific, even analysts and
tion. These results should not be used
investors use it as a key figure.
Besides highlighting the importance
of intangible assets and the challenges
The results of our analyses show
as part of a transaction are likely to be faced during their identification and
industry-specific identification
similar to those seen in previous acquisi valuation, including industry specific
patterns for intangible assets.
tions within the industry, each target is features, this study examines selected
unique and different assets may be iden transactions in order to highlight how
tified or similar asset types may have they have been accounted for, including as a substitute for a detailed purchase
different characteristics, such as the the percentage of the purchase price price allocation exercise for a future
length of their useful economic lives. In that has been allocated to intangible transaction, including the identification
instances where no industry typical in assets and goodwill. The aim of our and valuation of the transaction specific
tangible assets have been identified research was to determine whether it intangible assets. Future transactions
(or atypical assets have been identified) is possible to identify a “typical” result within an industry may yield different
or where an asset’s value as a percent for a purchase price allocation within results to precedent transactions, de
age of the purchase price significantly a specific industry and, if so, to provide pending on the nature of the target com
differs from the results of other purchase an explanation for this in terms of the pany.
price allocations within this industry, it value-added chain within the industry.
needs to be clearly understood why
this is the case. The acquirer’s auditors, The results of this study are based on
the German inspection authority for the analysis of 342 selected transactions
Aim, approach and methodology
Aim
With respect to the chosen sample of

business combinations this study aims Automotive
to provide the following insights:
a) Investigation of the percentage Building & Construction

allocation of intangible assets
(in sum) as well as goodwill to the
cost of the business combination Chemicals
(“purchase price”)
b) An industry specific analysis of the Computer & Semiconductors

relative allocation of the purchase
price to specific categories of identi
fied intangible assets and an explana Consumer Products & Services
tion of the value drivers underlying
these intangible assets; and
Energy & Power Generation
c) An explanation of the main industry
specific identified intangible assets
by means of reference to the typical Entertainment & Media
value-added chain within the industry.
The industries analysed within this Financial Services

study are:
Industrial Products
Internet & E-Commerce
Life Science & Healthcare
Software
Telecommunications
Transportation & Logistics
Aim, approach and methodology 9
Approach and methodology
For the above industries, selected busi p The type and value of intangible as- For the purposes of this study, where
ness combinations between 2003 sets, as well as their categorization a business combination under IFRS 3
and 2007 have been analysed. Data for into groups according to IFRS or SFAS involved the purchase of a percentage
these transactions has been obtained (including marketing related, cus stake of less than 100%, we have pro-
from publicly available information (e.g. tomer related, contract related, tech portionally increased the purchase price
company annual reports) and our own nology related and other unspecified to reflect a 100 % stake (i.e. full owner-
experience. intangible assets) ship) in the target company in order to
improve the comparability of the results.
In all we have examined 342 transac p The ratio of the value of goodwill to
tions, of which 198 acquirers were the purchase price
required to report under IFRS and 144
under US GAAP. p The ratio of the total value of intangi
ble assets to the purchase price
For the business combinations analysed,
the following classifications and ratios p The ratio of the value of specific
have been determined for each industry: categories of intangible assets to the
purchase price (where this informa
tion is available).
Executive summary
Overview of allocation of purchase price

to goodwill – industry observations
Executive summary: Overview of allocation of purchase price to goodwill 11
Brief
3 Most industries show a percentage allocation of purchase price
to goodwill that is higher than 50%
3 Regarding goodwill, misjudgement with respect to estimated

synergies and projected growth rates may lead to significant
impairment risks
Goodwill arising from a transaction is calculated as the total purchase price minus
the sum of the fair values of the acquired tangible and intangible assets, liabilities,
contingent liabilities and deferred taxes.
Our research shows that in the majority of the industries analysed, the percentage
allocation of the purchase price to goodwill is typically over 50%. This is illustrated
in the chart below.
Percentage allocation of purchase price to goodwill by industry

(Median)
Automotive 44.8%
Building & Construction 68.4%
Chemicals 36.2%
Computer & Semiconductors 49.1%
Consumer Products & Services 45.9%
Energy & Power Generation 36.0%
Entertainment & Media 57.2%
Financial Services 43.4%
Industrial Products 55.9%
Internet & E-Commerce 70.4%
Life Science & Healthcare 54.8%
Software 62.5%
Telecommunications 56.0%
Transportation & Logistics 58.8%
Elements of goodwill – economic reasons for a positive residual amount

(examples)
Overpayment
Goodwill from restructuring and synergies
Goodwill
Going concern goodwill
(derivative goodwill)
Cost of First-time consolidation (generally

business intangible assets)
combination Fair value step-up of assets that have
New equity after already been balanced
purchase price allocation
Book value of equity of the acquired
In percentage terms, the highest
company / business
allocation to goodwill can be seen in
the Internet & E-Commerce (70.4%),
Building & Construction (68.4%)
and Software (62.5 %) industries. The
smallest allocation occurred within the
Energy & Power Generation (36.0%), ums are also often paid by a purchaser, the objective of increasing shareholder
Chemicals (36.2 %) and Financial depending on the specific situation. value. A key reason for this seems to
Services (43.4%) industries. To explain Control premiums arise when an acquirer lie in the high prices paid. Overly optimis
these results, the components of good pays more than the market price for a tic expectations of the future value of a
will need to be examined. company in order to secure a majority of potential target are driven by overestima
the voting rights and therefore effective tion of expected market growth rates,
Under the acquisition method, a number control of the purchased company. overestimation of synergistic value and
of intangible assets are subsumed into underestimation of integration costs.
goodwill rather than being separately This results in excessive bid premiums
During times of strong economic
recognised on the acquirer’s balance being paid which generate high levels of
growth, when M&A activity
sheet. The future economic benefits ac goodwill and a significant risk of future
is high, control premiums of 40%
cruing to the purchaser are generated impairment.
over market capitalisation are
by the acquired entity’s assets and liabili
not uncommon.
ties, including those not recognised on With respect to the expected long-term
the balance sheet, such as the assem industry growth rates, our results show
bled workforce, the geographic pres Purchasers are willing to pay a control a relatively high percentage allocation
ence or walk-in customers. Furthermore, premium as there is often an expectation of the purchase price to goodwill, which
that by gaining full control of the target, may reflect optimistic expectations
its operations can be more efficiently regarding synergies or large bidding pre
The percentage allocation of
managed to improve earning expecta miums paid as part of the purchase
purchase price to goodwill
tions. In addition to control premiums, consideration. Optimistic expectations
allows to draw conclusions on
bid premiums are often paid when a of an acquired company’s future financial
expected synergies.
competitive bidding process develops performance can lead to an increased
during the sale of a company and the risk of future goodwill impairment, par
buyer specific synergies accruing to the purchaser pays an additional amount in ticularly during an economic downturn,
purchaser may arise from a transaction order to secure the target ahead of which may have a significant impact on
as a result of the combined businesses rival bidders. earnings.
being able to achieve, for example, cost
savings or increases in revenue which In practice, the success of an acquisition The fair value determination of identified
may not have been possible for other po frequently falls short of pre-deal expecta intangible assets relies on a number of
tential acquirers. Control and bid premi tions, particularly when measured against important assumptions as well as fore
Executive summary: Overview of allocation of purchase price to goodwill 13
cast data, both of which introduce sub bution capabilities. Consequently, when
jectivity into the valuation process. a transaction occurs within this industry,
Many acquiring companies have used a high proportion of the acquired intan
these areas of discretion to allocate a gible assets will be subsumed into good
high percentage of the purchase consid will rather than recognised separately
eration to goodwill in order to reduce on the acquirer’s balance sheet.
the future amortisation charge associ
ated with the identified intangible assets In general, when a company is consider
purchased as part of the transaction. ing impairment testing in relation to
While this approach has a positive im goodwill arising from a transaction, it is
pact on earnings, it is questionable important to analyse the individual com
whether the resulting fair value balance ponents of the goodwill balance as well
sheet reflects the reality of the transac as the overall transaction. This requires
tion. In addition, while earnings after industry specific knowledge in order
amortisation might initially be relatively to forecast any expected synergies and
higher, a high goodwill balance may the long-term growth expectations for
subject the acquiring company to a the market.
greater risk of future impairment, particu
larly during times of economic decline.
To some degree, where a high level of

goodwill arises from a transaction, this
can be explained by examining the
characteristics of the specific industry.
For example, within the Building & Con
struction industry, a company’s ability to
generate profit and capture market share
is partly determined by its geographical
High percentage allocations

of purchase price to goodwill
can partially be explained by
industry characteristics.
presence, its economies of scope in

relation to storage facilities and its distri
Overview of allocation of purchase price

to intangible assets – industry observations
Executive summary: Overview of allocation of purchase price to intangible assets 15
Brief
3 In the majority of the analysed industries intangible assets are
the key value drivers
3 The key intangible value drivers differ significantly across

industries. An appropriate identification phase within the
purchase price allocation process requires profound industry
knowledge
Our study shows that the percentage allocation of the purchase price to intangible
assets as well as the types of intangible assets identified as part of a transaction,
differ significantly across industries. This is summarised in the chart below.
Percentage allocation of purchase price to intangible assets by industry

(Median)
Automotive 23.1%
Building & Construction 6.0%
Chemicals 33.0%
Computer & Semiconductors 40.0%
Consumer Products & Services 57.0%
Energy & Power Generation 7.3%
Entertainment & Media 43.5%
Financial Services 22.5%
Industrial Products 31.5%
Internet & E-Commerce 34.8%
Life Science & Healthcare 45.1%
Software 23.8%
Telecommunications 29.3%
Transportation & Logistics 30.0%
Main challenges with regard to the valuation of intangible assets
p Appropriate identification phase within the purchase price allocation

process requires profound industry knowledge
p Understanding of the commercial relevance
p Selection of adequate valuation methods
p Determination of appropriate valuation parameters
When intangibles are recognised as part

of the acquired business, these will be
subject to amortisation over their remain
ing useful economic life and thus result marketing related (69.2 %), with product being a key value driver. The medical
in reduced earnings in future periods. brands being frequently recognised. device manufacturing sector mainly
Depending on the useful economic life indentifies technology related intangible
assumed, this effect may be significant. The transactions analysed within the assets (16.1%), in particular patented
In cases where an asset is determined to Entertainment & Media industry in products are recognised.
have an indefinite useful life, such as clude the print and publishing and film,
for very strong brands or R&D projects, television and broadcasting sectors. Across all industries, the Building &
these assets are not amortised but in The main value drivers in the print and Construction industry attributes the
stead tested for impairment on an publishing sector are customer related lowest value to intangible assets, allocat
annual basis. intangible assets (38.0%) such as ing an average of just 6.0 % of the pur
subscriber and advertising customer chase price. Within the Building & Con
bases, and marketing related intangible struction industry, our analysis covers
The Consumer Products &
assets (27.5 %) such as brand names mainly mining companies and mineral
Services, Life Science & Health-
associated with magazines, journals and extraction and processing companies.
care as well as Entertainment &
newspapers. In the film, television and Our results show the most frequently
Media industries show the
broadcasting sector, marketing relating recognised intangible category to
highest percentage allocation of
intangible assets are prominent (14.3 %), be marketing related intangible assets
purchase price to intangible
such as TV and radio station names. (4.8%), consisting primarily of product
assets.
brands. Theoretically, these results
Our analysis of the Life Science & seem to make sense. The value-added
Our analysis shows that the industries Healthcare industry covers the research chain within this industry indicates that
with the highest allocation of purchase and pharmaceutical, biotechnology, ge a company’s success depends on its
consideration to intangible assets were nerics and medical device manufacturing ability to build a local network of mines.
the Consumer Products & Services sectors. Within the research and phar Construction materials in their basic
(57.0%), Life Science & Healthcare maceutical and biotechnology sectors, form are a relatively homogenous com
(45.1%) and Entertainment & Media a high proportion of technology related modity in a fragmented market, in which
(43.5%) industries. intangible assets (31.4 % and 27.5% customers exhibit highly price sensitive
respectively) are identified. These con behaviour. In terms of the value-added
In the Consumer Products & Services sist primarily of research and develop chain, a company’s geographic location
industry, our analysis focuses primarily ment projects, as well as patented and and its economies of scope in relation to
on transactions occurring within the non-patented products. Transactions its industrial premises play an important
clothes and beverages sectors. Our in the generics sector indicate a strong role. Although all these various factors
results show that a high proportion of presence of marketing related intangible are key value drivers for a company, they
the intangible assets identified were assets (31.9 %), with product brands do not satisfy the criteria to be recog
Executive summary: Overview of allocation of purchase price to intangible assets 17
nised as separate intangible assets. quantity premiums generated compared

In some niche sectors, a strong product to no-name products. For the valuation
brand may allow a company to secure of customer relationships including
high order volumes compared to its identified customer contracts and related
competitors. customer relationships, forecast reve
nues, expected contract extensions and
The differences in the results across future customer churn rates all need to
the sectors we have analysed highlight be estimated.
the challenge of identifying and valuing
intangible assets acquired as part of a
transaction. The first step is to identify
the intangible assets, which requires an
understanding of the key characteristics
and value drivers within an industry and
its sector. Next, an appropriate valuation
methodology must be selected and
important assumptions must be made
which will directly affect the fair value
conclusion. For many types of intangible
assets, income-oriented valuation meth
ods are applied, which requires the
forecasting of income streams gener
ated by the assets. In the case of identi
fied technology, for example, forecasts
need to be made in relation to the cash
flows that the technology will generate
through its contribution to the production
and manufacturing process. Research
and development projects should be
evaluated in terms of any remaining de
velopment costs, the probability of prod
uct completion and the length of the
product cycle once it has entered com
mercial production. In the case of prod
uct brand valuations, the useful eco
nomic life needs to be determined, as
well as the level of potential price and
Mapping of business combinations

in accounting
General framework
Mapping of business combinations in accounting: General framework 19
On 31st March 2004, as part of phase I while recognising an associated minority

of the business combinations project, interest. The key consequence of IFRS 3
the IASB introduced IFRS 3 to replace and SFAS 141 lies in the requirement to
IAS 22. The new standard brought IAS identify, value and disclose qualifying in
more closely in line with US GAAP, in tangible assets separately from goodwill.
particular SFAS 141, and reflected the If intangible assets with definite lives
IASB’s view that the value of intangible are identified, these should be amortised
assets and their associated useful eco over the remaining useful life of the
nomic lives were becoming increasingly assets and thus there will be a reduction
important. As part of this process, IAS in net income in future periods. This ac
38 was revised, including specific guid counting treatment of an acquisition
ance on the identification of purchased seems to make sense; the buyer has al
intangible assets. Under IAS 22, an ready paid for the future expected gains
acquisition could be accounted for under and he can therefore only show those
the pooling-of-interests methods, how gains which exceed expectations. Ana
ever since the introduction of IFRS 3 lysts need to be careful to distinguish
companies must use the acquisition between the operational result of a com
method, which requires the identifica pany and its reported EBIT, as the latter
tion of an acquirer. can be significantly affected over several
years by the amortisation associated
Under the acquisition method, the cur with intangible assets.
rent fair values of all identifiable tangible
and intangible assets, liabilities and Recognising the importance of intangible
contingent liabilities of the purchased assets for international accounting
company need to be determined. The standards, the IDW has issued a practi
difference between the purchase con cal guideline called RS HFA 16, which
sideration and the market price of the provides guidance on the determination
net assets of the purchased company of the current market prices of intangible
(including deferred taxes) is recognised assets. RS HFA 16 outlines permitted
as goodwill. The release of the revised valuation methodologies and states
version of IFRS 3 as well as SFAS 141R the order of preference in which these
in early 2008 marks the end of phase II should be applied, as well as providing
of the business combination project in guidance on the derivation of the correct
association with the FASB. One implica cost of capital for income-oriented valua
tion of this project is that, when a major tion methods. With IDW S 5, the IDW
ity stake acquisition of less than 100 % exceeds the general guidance offered by
occurs, the acquiring company may the international accounting standards,
account for the purchase by consolidat and considers the valuation of intangible
ing 100 % of the acquired business assets in many different circumstances.
Identification of intangible assets
Unlike tangible assets, a defining charac Due to the legal or contractual and sepa
teristic of intangible assets is their lack rability criteria for identification, some
of physical substance, meaning they intangible assets such as trademarks,
are often hard to recognise and need to patents and customer contracts can be
be subject to a structured identification easily identified in case of a business
process. Although accounting literature combination. For those assets identified,
offers a variety of definitions for “intan
gible asset” and other associated terms
For the identification of potential
(such as intellectual property and intel
intangible assets an understand
lectual capital), the international account
ing of the key value drivers is
ing standards provide a specific definition,
essential.
which is set out in IFRS 3, in conjunction
with IAS 38. A similar definition is pro
vided by SFAS 141. The identification of some may not be recognised as their
an intangible asset focuses on the con value is considered to fall below the
tractual or legal basis of the asset, either materiality threshold. To identify those
directly or indirectly, through the possi intangible assets which might be recog
bility of a contractual based usage of the nised within one of the five potential
asset or its ability to be separated from categories (see table on the next page),
the business. a sound understanding of the main value
drivers of the purchased company is
The process of identifying intangible as necessary. For example, for one particu
sets takes place using the identification lar acquired business a trademark might,
criteria according to IFRS 3 or SFAS 141, economically speaking, simply represent
with the standards providing a catalogue the formal name of a product without
of examples to distinguish between allowing the owner to command a price
groups of intangible assets (see also the premium or achieve higher order vol
table on page 21): umes, but in another business it might
represent a key value driver behind a
p technology related, company’s success. In some instances,
technology might be considered a prod
p contract related,
uct technology, which represents the
p customer related, unique features of a company’s product,
or alternatively it might be considered a
p marketing related, and
process technology. Further, technology
p art related intangible assets. needs to be classified as patented or
non-patented. Patented technologies
Mapping of business combinations in accounting: Identification of intangible assets 21
Illustrative examples for intangible assets according to IFRS 3 and SFAS141
p Patented technologies
p Computer software and mask works
Technology related p Unpatented technologies
p Databases, including title plants
p Trade secrets such as secret formulas,
processes and recipes
p Licences, royalties, standstill agreements

p Advertising, construction management, service, delivery
and supply contracts
p Lease agreements (independently of whether the acquiree
is the lessee or the lessor)
Contract related p Construction permits
p Franchise agreements
p Operating and broadcasting rights technologies). Furthermore, it is also
p Servicing contracts, such as mortgage servicing contracts unclear whether customer relationships
p Use rights, such as drilling, water, air, timber cutting held by pharmacies and hospitals are
and route authorisations
identifiable, valuable and recognisable
p Employment contracts
intangible assets separate from their as
p Customer lists sociated patented agents under IFRS 3
Customer related p Order or production backlog or SFAS 141. Within certain categories
p Customer contracts and related customer relationships the classification of an asset may be
p Non-contractual customer relationships
unclear. As an example, in the Automo
tive and Consumer Products & Services
p Trademarks, trade names, service names,
collective marks, certification marks industries family brands are
Marketing related p Trade dress (unique colour, shape or package design)
p Newspaper mastheads
p Internet domain names For the identification and
p Non-competition agreements separation of single value drivers
an analysis of the value-added
p Plays, operas and ballets chain and the industry specifics
p Books, magazines, newspapers and other literary works
p Musical works such as compositions, song lyrics
is necessary.
Art related and advertising jingles
p Pictures and photographs
p Video and audiovisual material, including motion pictures
frequently identified but often account
or films, music videos and television programmes for several specific product brands
covered by the same name. In this case,
consideration must be given to the
extent to which the product brands need
meet the contractual based criteria, patented and lead to a monopoly position to be recognised separately from the
while non-patented technologies might within the pharmaceutical industry, gen family brand. An important starting point
be identified based on the separability erating cash flows due to the production for this analysis is a sound understanding
criteria. The decision of how to value the and distribution of the patented products. of the industry as well as its value-added
technology depends on the analysis of chain, which can be aided by an analysis
its economic value, which can be shown If a multitude of prospective assets exist, of precedent transactions for which
in the cash flows relating to the particular which are interacting and correlated, information has been publicly disclosed.
technology. For example, a process the identification process becomes more
technology might show significant cost complex. For example, in the research
savings potential relating to the input of and pharmaceutical sector it is question
resources, and therefore the cost of able whether product brands are inde
goods sold, resulting in a margin effect. pendent, value driving, intangible assets
Alternatively, the technology might be separate from patented agents (patented
Valuation of intangible assets
Intangible assets that have been pur Income-oriented approaches are the The multi-period excess earnings
chased as part of a business combina most commonly used fair value method method might only be used to value one
tion need to be recognised at their ologies. Here, the value of an intangible kind of intangible asset identified within
current fair value, with the fair value a purchase price allocation exercise.
being defined as the amount at which The main value drivers for a company are
Due to the restricted applicability
knowledgeable, independent and willing industry specific, with our research sug
of the market-price-oriented
parties would buy and sell the asset in gesting that, for example, technology is
and the cost-oriented approaches
an arm’s length transaction. The deter a key intangible within the semiconduc
the income-oriented approach
mination of fair value is based on the tor industry, telecoms companies rely
is the most commonly used fair
principle of individual value, and when significantly on contractual customer re
value methodology.
valuing an intangible asset the following lationships and in the research and phar
methodologies are applied, in descend maceutical sector patented agents play
ing order of preference: market-price asset is calculated by discounting future a vital role.
oriented approach, income-oriented ap cash flows generated by the asset, which
proach or cost-oriented approach. accrue to the acquiring company over A second type of income-oriented
the asset’s estimated remaining useful approach is the relief from royalty ap
Within the three main approaches, sev economic life. proach. This is used to value asset types
eral specific techniques can be applied for which there is an active market in
depending on the nature of the asset Although it is most commonly used, which the asset is licenced for use by its
being valued. The chosen methodology the application of an income-oriented owner to an unrelated party. The value
has to be used for all similar assets approach presents challenging prob of the asset reflects the savings realised
(please also refer to the table on page lems. One type of income-oriented by owning the asset and not having to
23). approach is the multi-period excess pay the owner to use it. Typical assets
earnings method (MEEM). This starts valued under this approach include brand
In practice, although it is the preferred by forecasting the cash flows from the names and proprietary technologies
approach, it is often not possible to use sale of products or rendering of services, used in a company’s manufacturing pro
the market-price-oriented approach which are produced by a bundle of cess. The premise associated with this
as there is no observable active market assets. These cash flows are adjusted to valuation technique is that if the assets
on which the intangible asset trades. reflect the contribution of supporting were licenced to an unrelated party, the
Further, due to the unique features exhib assets by subtracting notional contribu unrelated party would pay a percentage
ited by an asset, it is often not possible to tory asset charges. The application of of revenue for their use. The brand
determine its market value by observing this method for valuing a single intangi owner is, however, spared this cost. This
the price at which similar assets have ble asset requires that the asset to be cost saving, or relief from royalty, repre
traded in the market place and making valued is the main value driver. Although sents the value of the brand. When
adjustments for the asset being valued. other assets support the generation of valuing an asset such as a brand, under
The market-price-oriented approach is the revenue stream, they are considered this technique, it is often the case that
therefore not commonly applied. secondary to the asset being valued. royalty rates for similar brand types are
Mapping of business combinations in accounting: Valuation of intangible assets 23
Valuation approaches and methods
Valuation Market Income Cost

Approach: Approach Approach (DCF) Approach
Method: Market price in an Relief from Royalty Reproduction

active market Method Cost Method
Multi-Period Excess Replacement

Analogy Method
Earnings Method Cost Method
Incremental Cash
Flow Method
Direct Cash Flow

Method
rarely applicable preferred method not related to future

financial benefits
observed, however they may differ example, the contractual residual

in terms of the specific market or sector, terms need to be determined, as well as
expected growth rates and margins. the likelihood of contract extensions
In this instance, the observed royalty rate or renewals. In the context of research
needs to be adjusted by an appropriate and development projects, a number of
amount to reflect the differences in the parameters need to be considered, in
characteristics of the subject asset and cluding the forecast revenues from the
the comparable assets identified. project, the date of completion, the prod
uct life cycle and the potential risk of
To determine the fair value of an intangi the product failing to reach the comple
ble asset using an income-oriented tion stage. These examples highlight
approach, the choice of method and the that the derived value for an intangible
formulation of appropriate valuation asset may vary significantly depending
assumptions are of crucial importance. upon the assumptions employed.
Cost-oriented approaches are hardly

One of the key challenges of
used when valuing intangible assets.
the income-oriented approach is
The main reason for this is that the cost
the derivation of the appropriate
approach determines the fair value of
industry specific valuation param
an asset by estimating the current cost
eters, like the useful economic
to purchase or replace the asset and
life or the contractual residual
therefore does not consider future eco
terms as well as the likelihood of
nomic benefits arising from the asset.
contract extensions or renewals.
The application of this approach is only
appropriate for assets which are usually
As with the identification process, indus accounted for by the costs of reproduc
try specific knowledge is needed, espe tion, such as software.
cially for the determination of the use
ful economic life. In the case of identified
contractual customer relationships for
Empirical results:
Intangible assets by industry and category
Automotive
Empirical results: Automotive 25
Industry highlights
3 Customer related intangible assets in terms of order books and
framework agreements as well as technologies represent the
key intangible value drivers of automotive suppliers
3 For automotive manufacturers technologies and product brands

are the key intangible assets
With respect to the automotive industry,

our analysis shows that customer, mar
keting and technology related intangible Automotive industry – percentage of purchase price allocated to specific
assets are the primary intangible assets intangible asset categories (Median)
recognised within the automotive indus

try. With a percentage allocation of pur Technology related 9.8%
chase price to intangible assets amount
ing to 23.1%, the automotive industry Contract related 0.7%
ranges below other industry averages.
A further differentiation into the auto Customer related 21.8%
motive suppliers and automotive manu
facturers subsectors permits a deeper Marketing related 7.8%
understanding of the specific key intangi
ble value drivers. Unspecified 2.9%
Automotive suppliers Automotive suppliers – percentage of purchase price allocated to specific

intangible asset categories (Median)
The results of the identification of intan

gible assets within the automotive indus Technology related 11.5%
try can be explained by considering the
structure of the industry and its value- Contract related 0.7%
added chain. Car manufacturers rely di
rectly on automotive product suppliers, Customer related 21.8%
including system suppliers, offering
products such as brakes and airings Marketing related 5.3%
which are functionally related, and mod
ule suppliers, offering products such as Unspecified 2.9%
seats and shock absorbers which are re
lated in terms of their location. The prod
uct suppliers themselves rely on compo
nent suppliers, which offer items such as The products and services delivered oped core competencies in these areas
mechanically processed plastic compo by automotive part suppliers are dictated in the manufacturing process, while sup
nents, castings, forgings and standard by those demanded by automotive pliers have specialised in the production
ised products, including electric motors. manufacturers. Traditionally, manufactur and supply of those components and
Finally, component suppliers rely on ers perform tasks such as designing the systems not produced by the manufac
suppliers of raw materials, such as steel vehicle and its bodywork, vehicle paint- turers. These dependencies generate a
producers, in order to manufacture com work, production of the engine and gear network of co-operation and reliance be
ponents (our analysis does not include box and final assembly of the vehicle. tween car manufacturers and suppliers.
transactions within this final group). As a result, manufacturers have devel
An automotive manufacturer will typi of supply over a particular period of ity. In terms of the purchase price alloca
cally demand products from a supplier time, without purchase quantities being tion exercise, this is captured by identified
that are characterised by high quality, contractually binding. Due to the high corporate brands and product brands.
extreme strength and low cost. A manu probability of the order being completed,
facturer will often invite suppliers to bid these basic agreements are typically ac Ensuring effective integration into a
for a contract to supply a particular prod counted for on an economic value basis. manufacturer’s development and plan
uct, creating a highly competitive envi Therefore, the agreements are recog ning processes is an important factor
ronment in which suppliers specialise nised as contractual based customer re in the success of a supplier. As a result
in the production of individual compo lationships in the context of a purchase of the highly competitive environment
nents requiring highly specialised tech price allocation exercise. Order backlogs in which they operate, suppliers strive
nologies. When a supplier bids for a represent an intangible asset due to their to maintain strong customer relation
contract, a basic agreement between contractually binding nature. ships with manufacturers, and this is
the manufacturer and supplier is typically often achieved by developing specialised
signed, along with precise orders, If a supplier develops a strong brand name products, which will be required by
creating a backlog. The basic agreement within the industry, then its name may the manufacturer in future operations,
does not constitute a binding customer come to represent high quality products, through research and development
order, but rather specifies the conditions characterised by their strength and reliabil programmes. Suppliers develop
Automotive suppliers – identification and classification of intangible

assets and value drivers
Main value drivers Classification
Distribution agreement with automotive manufacturers Customer
Nomination letter Customer
Product related technologies, patented (i.e. brake technologies) Technology
Basic supplier agreements Customer
Supporting value drivers
Process technologies in relation to the manufacturing process Technology
Basic technologies (often non-patented) Technology
Research and development projects Technology
Software solutions Technology
Corporate brands Marketing
Empirical results: Automotive 27
Automotive manufacturers – percentage of purchase price allocated

to specific intangible asset categories (Median)
Technology related 8.0%
Contract related 0.0%
Customer related 0.0%
Marketing related 9.4%
Unspecified 2.2%
Automotive manufacturers – identification and classification

of intangible assets and value drivers
Main value drivers Classification
Corporate brands, car brands Marketing
Automobile specific technologies

Technology
(e.g. drive technologies, usage oriented technologies)
Process technologies in relation to the production process Technology
Customer unrelated technologies

Technology
(basic technologies, often non-patented)
Research and development projects
Technology
(technologies, development projects, design projects, prototypes)
Supporting value drivers
Planning and simulation software solutions Technology
Dealer network (other parties) Customer
Fleet management, key accounts, leasing agreements Customer
products themselves or through close cesses are primarily reflected in the possibly known for its high quality, reli
co-operation with manufacturers. strength of the specific car brand or the ability, safety, value for money, sporti
brand of the car manufacturer. The ness or appearance and customers
same is also true for assemblers and potentially purchase a vehicle on the
Automotive manufacturers manufacturers of car bodies, engines basis of these characteristics.
and gearboxes, where process and prod
In the field of automobile design, research uct specific technologies are frequently In addition to brands, customer relation
and development projects in relation identified as key intangible assets. In ships are identified as a major value
to new technologies (drive technologies, the automobile industry, brand names driver. Further intangible assets identified
usage technologies or environmental play a key role within the selling process, within the industry include dealer net
technologies) and the design of future with specific brands recognised by con works, key account relationships or fund
models are the main intangible assets sumers for their favourable characteris ing or leasing agreements relating to the
recognised. Marketing and selling pro tics. For example, a particular brand is funding activities of car manufacturers.

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CO RPO RAT E F I N A N C E

Intangible Assets and

About this study 4

Aim, approach and methodology

Approach and methodology 9

Overview of allocation of purchase price to intangible assets –

Mapping of business combinations in accounting

Identification of intangible assets 20

Valuation of intangible assets 22

Empirical results: Intangible assets by industry and category

Building & Construction 28

Computer & Semiconductors 36

Consumer Products & Services 40

Energy & Power Generation 46

Entertainment & Media 50

Internet & E-Commerce 64

Life Science & Healthcare 68

Transportation & Logistics 82

About this study

Munich, May 2009

Dr. Marc Castedello Christian Klingbeil

The financial mapping of business com­ Medimmune Inc. for approximately

Example: Allocation of purchase price on intangible assets and goodwill

PPE and working capital: 50

Aim, approach and methodology

With respect to the chosen sample of

a) Investigation of the percentage Building & Construction

b) An industry specific analysis of the Computer & Semiconductors

The industries analysed within this Financial Services

Internet & E-Commerce

Life Science & Healthcare

Transportation & Logistics

Approach and methodology

Overview of allocation of purchase price

3 Regarding goodwill, misjudgement with respect to estimated

Percentage allocation of purchase price to goodwill by industry

Building & Construction 68.4%

Computer & Semiconductors 49.1%

Consumer Products & Services 45.9%

Energy & Power Generation 36.0%

Entertainment & Media 57.2%

Financial Services 43.4%

Industrial Products 55.9%

Internet & E-Commerce 70.4%

Life Science & Healthcare 54.8%

Transportation & Logistics 58.8%

Elements of goodwill – economic reasons for a positive residual amount

Cost of First-time consolidation (generally

To some degree, where a high level of

High percentage allocations

presence, its economies of scope in

Overview of allocation of purchase price

3 The key intangible value drivers differ significantly across

Percentage allocation of purchase price to intangible assets by industry

Building & Construction 6.0%

Computer & Semiconductors 40.0%

Consumer Products & Services 57.0%

Energy & Power Generation 7.3%

Entertainment & Media 43.5%

Financial Services 22.5%

Industrial Products 31.5%

Internet & E-Commerce 34.8%

Life Science & Healthcare 45.1%

The financial mapping of business com Medimmune Inc. for approximately

recognised within the automotive indus

The results of the identification of intan