Implied Discount rate - NABE

The 2011 temporary regulations: differential incomestream• The 2011 temporary regulations introduce the concept of the “implied discount rate”of the “differential income stream” between the two alternatives– The “differential income stream” is defined as the difference between theundiscounted income streams under the cost sharing and the licensingalternatives (akin to the residual income)– The “implied discount rate” of the “differential income stream” is the rate thatyields an equivalent value of the PCT as determined under the income methodusing different discount rates for the two alternatives– The implied discount rate should be consistent with reliable direct evidence– WACC for uncontrolled companies developing intangibles similar to the costshared intangibles is suggested as a basis to determine the appropriate implieddiscount rate– The implied discount rate provides a basis for assessing whether the incomemethod has been reasonably applied13