Valuation for Financial Reporting : Fair Value Measurements and ...

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SFAS No. 141, Business Combinations 27Such assets distinguish themselves from intangible assets in that intangible assetsdo not rival each other for incremental returns. In fact, intangible assets can be appliedto multiple uses for multiple returns. As Professor Lev says:The non-rivalry (or non-scarcity) attribute of intangibles – the ability to use such assets insimultaneous and repetitive applications without diminishing their usefulness – is a majorvalue driver at the business enterprise level as well as at the national level. Whereasphysical and financial assets can be leveraged to a limited degree by exploiting economiesof scale or scope in production (a plant can be used for at most three shifts a day), theleveraging of intangibles to generate benefits – the scalability of these assets – is generallylimited only by the size of the market. The usefulness of the ideas, knowledge, andresearch embedded in a new drug or a computer operating system is not limited by thediminishing returns to scale typical of physical assets (as production expands from two tothree shifts, returns decrease due, for example, to the wage premium paid for the thirdshift and to employee fatigue). In fact, intangibles are often characterized by increasingreturns to scale. An investment in the development of a drug or a financial instrument (arisk-hedging mechanism, for example), is often leveraged in the development of successordrugs and financial instruments. Information is cumulative, goes the saying. 7IDENTIFICATION AND CLASSIFICATIONIdentification of intangible assets is a broad endeavor. There are the well-acceptedintangibles such as customer base, in-process research and development, andtechnology, and intellectual property intangibles such as patents, copyrights, trademarks,trade secrets, and know-how. The value of these assets typically accountfor most of an enterprise’s total intangible value, depending on the industry.There are also unique intangible assets peculiar to an industry or enterprise, suchas ‘‘the base membership in a cooperative that sells milk from a dairy herd.’’ 8In an attempt to provide some structure to the recognition of identifiable intangibleassets and to enhance the longevity of its financial model, the FASB classifiedintangibles into five categories:1. Marketing-related intangible assets2. Customer-related intangible assets3. Artistic-related intangible assets4. Contract-based intangible assets5. Technology-based intangible assets 9The FASB provides an explanation and examples for each of the categories 10(Exhibit 2.1). Notably, assembled workforce was excluded because it fails theseparability and transferability test. An enterprise may have excellent employeeswho contribute mightily to the success of an organization, but they have no value ifseparated from the business. The FASB instead chose to categorize assembledworkforce within the category of goodwill. 11 Exhibit 2.2 provides an expandedbut unclassified list of intangibles. 12
28 Valuation for Financial ReportingExhibit 2.1 Examples of Intangible Assets that Meet the Criteria for RecognitionApart from GoodwillThe following are examples of intangible assets that meet the criteria for recognition as anasset apart from goodwill. The following illustrative list is not intended to be all-inclusive,thus, an acquired intangible asset might meet the recognition criteria of this Statement butnot be included on that list. Assets designated by the symbol (*) are those that would berecognized apart from goodwill because they meet the contractual-legal criterion. Assetsdesignated by the symbol (^) do not arise from contractual or other legal rights, but shallnonetheless be recognized apart from goodwill because they meet the separability criterion.The determination of whether a specific acquired intangible asset meets the criteria inthis Statement for recognition apart from goodwill shall be based on the facts and circumstancesof each individual business combination.A. Marketing-related intangible assets1. Trademarks, trade names *2. Service marks, collective marks, certification marks *3. Trade dress (unique color, shape, or package design) *4. Newspaper mastheads *5. Noncompetition agreements *B. Customer-related intangible assets1. Customer lists ^2. Order or production backlog *3. Customer contracts and the related customer relationships *4. Noncontractual customer relationships ^C. Artistic-related intangible assets1. Plays, operas, and ballets *2. Books, magazines, newspapers, and other literary works *3. Musical works such as compositions, song lyrics, advertising jingles *4. Pictures and photographs *5. Video and audiovisual material, including motion pictures, music videos, andtelevision programs *D. Contract-based intangible assets1. Licensing, royalty, standstill agreements *2. Advertising, construction, management, service, or supply contracts *3. Lease agreements *4. Construction permits *5. Franchise agreements *6. Operating and broadcast rights *
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210 IndexBusiness Enterprise Analys
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212 IndexGoodwill (continued )111,
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214 IndexLong-termcapital, 71debt,
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216 IndexSecurities and Exchange Co
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