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Relief from Royalty (RFR) Method: -

I.                 RFR Method is a method in which the value of the asset is estimated based on the present value of royalty payments saved by owning the asset instead of taking it on lease. It is generally adopted for valuing intangible assets that are subject to licensing, such as trademarks, patents, brands, etc.

II.               The fundamental assumption underlying this method is that if the intangible asset to be valued had to be licensed from a third-party owner there shall be a royalty charge for use of such asset. By owning the said intangible asset, royalty outgo is avoided. The value under this method is equal to the present value of the licence fees / royalty avoided by owning the asset over its remaining useful life.

III.              The following are the major steps in deriving a value using the RFR method:

(a)   obtain the projected income statement associated with the intangible asset to be valued over the remaining useful life of the said asset from the client or the target;

(b)   analyse the projected income statement and its underlying assumptions to assess the reasonableness;

(c)   select the appropriate royalty rate based on market-based royalty rates for similar intangible assets or using the profit split method;

(d)   deduct costs associated with maintaining licencing arrangements for the intangible asset from the resultant royalty savings;

(e)   apply the selected royalty rate to the future income attributable to the said asset;

(f)    use the appropriate marginal tax rate or such other appropriate tax rate to arrive at an after-tax royalty savings;

(g)   discount the after-tax royalty savings to arrive at the present value using an appropriate discount rate; and

(h)   Tax amortisation benefit, if appropriate, should be added to the overall value of the asset.

Multi-Period Excess Earnings Method (MEEM): -

       I.          MEEM is generally used for valuing intangible asset that is leading or the most significant intangible asset out of group of intangible assets being valued. The fundamental concept underlying this method is to segregate the earnings attributable to the intangible asset being valued. Intangible assets which have a finite life can only be used to value using MEEM. The value under this method is equal to the present value of the incremental after-tax cash flows (‘excess earnings’) attributable to the intangible asset to be valued over its remaining useful life.

     II.          The following are the major steps in deriving a value using the MEEM

a.     obtain the projections for the entity or the combined asset group over the remaining useful life of the said intangible asset to be valued from the client or the target to determine the future after tax cash flows expected to be generated;

b.     analyse the projections and its underlying assumptions to assess the reasonableness of the cash flows;

c.      Contributory Asset Charges (CAC) or economic rents to be reduced from the total net after-tax cash flows projected for the entity/combined asset group to obtain the incremental after-tax cash flows attributable to the intangible asset to be valued;

d.     the CAC represent the charges for the use of an asset or group of assets (e.g., working capital, fixed assets, assembled workforce, other intangibles) based on their respective fair values and should be considered for all assets, excluding goodwill, that contribute to the realisation of cash flows for the intangible asset to be valued;

e.     discount the incremental after-tax cash flows attributable to the intangible asset to be valued to arrive at the present value using an appropriate discount rate; and

f.       Tax amortisation benefit, if appropriate.

With and Without Method (WWM): -

I. Under WWM, the value of the intangible asset to be valued is equal to the present value of the difference between the projected cash flows over the remaining useful life of the asset under the following two scenarios:

(a) business with all assets in place including the intangible asset to be valued; and

(b) business with all assets in place except the intangible asset to be valued.

II. The following are the major steps in deriving a value using the WWM:

(a) obtain cash flow projections for the business over the remaining useful life of the said asset to be valued under the following two scenarios:

(i) business with all assets in place including the intangible asset to be valued; and

(ii) business with all assets in place except the intangible asset to be valued.

(b) analyse the projections and its underlying assumptions to assess the reasonableness of the cash flows;

(c) discount the difference between the projected cash flows under two scenarios to arrive at the present value using an appropriate discount rate; and

(d) Tax amortisation benefit, if appropriate.

Option Pricing Models: -

       I.          There are several methods to value options, of which the Black-Scholes-Merton Model and Binomial Model are widely used. The important inputs required in these models are as under:

a.     current price of asset to be valued;

b.     exercise price;

c.      life of the option;

d.     expected volatility in the price of the asset;

e.     expected dividend yield; and

f.       risk free interest rate.

     II.          These models value options by creating replicating portfolios composed of asset to be valued and riskless lending or borrowing.

COST APPROACH: -

       I.          Cost approach is a valuation approach that reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost). In certain situations, historical cost of the asset may be considered by the valuer where it has been prescribed by the applicable regulations/law/guidelines or is appropriate considering the nature of the asset.

     II.          Examples of situations where a valuer applies the cost approach are:

(a)   an asset can be quickly recreated with substantially the same utility as the asset to be valued;

(b)   in case where liquidation value is to be determined; or

(c)   income approach and/or market approach cannot be used.

    III.          The following are the two most commonly used valuation methods under the Cost approach:

(a) Replacement Cost Method: Replacement Cost Method, also known as ‘Depreciated Replacement Cost Method’ involves valuing an asset based on the cost that a market participant shall have to incur to recreate an asset with substantially the same utility (comparable utility) as that of the asset to be valued, adjusted for obsolescence. The following are the major steps in deriving a value using the Replacement Cost method:

a.     estimate the costs that will be incurred by a market participant for creating an asset with comparable utility as that of the asset to be valued;

b.     assess whether there is any loss on account of physical, functional or economic obsolescence in the asset to be valued; and

c.      adjust the obsolescence value, if any as determined under above from the total costs estimated under (a) above, to arrive at the value of the asset to be valued.

(b) Reproduction Cost Method: Reproduction Cost Method involves valuing an asset based on the cost that a market participant shall have to incur to recreate a replica of the asset to be valued, adjusted for obsolescence. The following are the major steps in deriving a value using the Reproduction Cost method:

a.     estimate the costs that will be incurred by a market participant for creating a replica of the asset to be valued;

b.     assess whether there is any loss of value on account of physical, functional or economic obsolescence in the asset to be valued; and

adjust the obsolescence value, if any as determined under (b) above from the total costs estimated under (a) above, to arrive at the value of the asset to be valued.