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Intangible Assets

Purpose: To provide directors and management with independent valuation information on intangible assets as a basis for making transactional decisions.

Intangible assets are long-lived assets used in the production of goods and services that, unlike fixed or tangible assets, lack physical properties. Intangible assets represent certain legal rights or competitive advantages developed or acquired by a business enterprise. Examples include: non-compete agreements, customer lists, employment contracts, and lease agreements.

A sub-classification of intangible assets is intellectual properties, which are intangible assets created by intellectual or inspirational processes. Examples include: trademarks, patents, copyrights, technical know-how, and data processing/technology.

Appraisals of intangible assets are required for many purposes including: purchase price allocations, goodwill impairment testing, sales and acquisitions, corporate planning, establishing royalty rates, strategic alliances, financing transactions, and cost-sharing arrangements. The valuation of intangible assets often involves linking cash flows to each asset class and developing supportable risk rates for those assets. The cash flows and risk rates for each intangible asset are determined by an analysis of a variety of factors, including the economic value of the assets to its owners, the enhancement the asset may provide to other assets, the intended future utilization of the asset, and the economic life of the asset. An appraiser may also consider market transactions for similar intangible assets; however, due to the diverse attributes and unique qualities of intangible assets, the comparability of market transactions is often limited.

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