Page 6 - Asset Valuation

S6 | Monday, May 16, 2016 | Asset Valuation | nylj.com
Legal Issues and Valuation
Of Tangible Assets, Patents and Copyrights
By steven L. Henning anD Peter s. twomBLy
In this article, we will explore the meth- odologies for valuing general classes of tangible assets as well as those methods applied to valuing intangible assets consist- ing of patents and copyrights. It has become increasingly clear that legal considerations can play an important role in asset valuation. Accordingly, we will also examine the impact of legal issues upon the valuation of tangible assets, patents and copyrights.
Purposes of Valuation
Understanding the nature and value of the assets of a business is essential for a variety of reasons. In the general context of operations, asset values are an important consideration in formulating asset management and protec- tion policies. Asset valuation can also bear
upon the amount of credit that may be made available to a business. In the context of a sale or other strategic transaction, asset valua- tion is obviously a central consideration in structuring and pricing the transaction. other purposes for which asset valuation may be important include, among others, financial and tax reporting, capital budgeting, litigation proceedings and purchase price allocations in connection with an acquisition transaction.
Valuation of Tangible Assets
Types—Fixed (PPE) and Current Assets
The practice of measuring assets at estimates of their current or fair value has increasingly replaced the practice of reporting assets at historical cost. While historical cost was assumed to provide “reliable” informa- tion, fair value is assumed to provide “rel- evant” information upon which management can rely in making its business decisions.
The meaning of “fair value” can differ sub-
stantially by asset class. Moreover, assets may be valued differently depending upon the con- text. For financial reporting purposes, in gen- eral, accounts receivable are reported at the amounts an entity ultimately expects to col- lect; inventory is reported at the lower of cost or market value, where market value is the sales price less sales costs; and investments are marked to market value each period with unrealized gains and losses being recognized.
however, for valuation purposes outside the context of financial reporting, the “fair value” of current assets and long-term fixed assets, such as property, plant and equip- ment (PP&e), is normally based upon one of three approaches: cost, market or income. As discussed below, the market and income approaches consider the future benefits the PP&e may provide whereas the cost approach considers the cost to obtain or reproduce the asset in its present condition.
Valuation Methodologies
Asset-Based or Cost Approach: The “asset-
based” or “cost” approach is predicated on the assumption that a prudent buyer would pay no more for an asset than it would cost to purchase the asset (tangible or intangible) at current market prices. This approach requires estimating the individual market values of the assets to derive an adjusted value. For example, in the case of inventory, an asset- based approach may be replacement cost or net realizable value, which is the amount for which it could be sold less any sales costs.
Market Approach: This approach is predi- cated on an active marketplace where similar assets are actively bought and sold. Some assets are actively traded, making the deter- mination of fair value straightforward. howev-
steven Henning is partner-in-charge of the financial advisory services group at Marks Paneth and Peter twombly is a partner in the corporate, securities and business transactions practice group of McCarter & English in New York.
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