ABV Goodwill & Intangible Asset Valuation 1 — Questions and Answers
Question 1: Under ASC 805, which of the following best describes 'goodwill' in a business combination?
- The excess of the fair value of identifiable net assets over the acquisition price
- The excess of the acquisition price over the fair value of identifiable net assets acquired (Correct answer)
- The book value of all intangible assets recognized by the acquiree
- The present value of expected future synergies discounted at WACC
Correct answer: The excess of the acquisition price over the fair value of identifiable net assets acquired
Under ASC 805, goodwill is the excess of consideration transferred over the fair value of identifiable net assets (assets minus liabilities) acquired in a business combination.
Question 2: The Multi-Period Excess Earnings Method (MPEEM) is most commonly used to value which type of intangible asset?
- Trade names and trademarks
- Non-compete agreements
- Customer relationships and developed technology (Correct answer)
- In-process research and development
Correct answer: Customer relationships and developed technology
MPEEM is most commonly applied to primary intangible assets such as customer relationships and developed technology, isolating their contributory asset charges to derive residual earnings.
Question 3: Which relief-from-royalty method assumption is most critical when valuing a trade name?
- The useful life of related customer relationships
- The appropriate royalty rate that a willing licensor and licensee would negotiate (Correct answer)
- The weighted average cost of debt for the entity
- The replacement cost of internally developed branding materials
Correct answer: The appropriate royalty rate that a willing licensor and licensee would negotiate
The relief-from-royalty method derives value by estimating the royalties saved because the company owns, rather than licenses, the trade name; the royalty rate selection is therefore the most critical assumption.
Question 4: Which of the following is NOT a recognized category of intangible assets under ASC 805?
- Marketing-related intangibles
- Customer-related intangibles
- Entity-related goodwill (Correct answer)
- Technology-based intangibles
Correct answer: Entity-related goodwill
ASC 805 categorizes intangibles as marketing-related, customer-related, artistic-related, contract-based, and technology-based; 'entity-related goodwill' is not a separate category — goodwill is residual, not a classified intangible.
Question 5: Contributory asset charges (CACs) in the MPEEM represent:
- Amortization of the subject intangible asset over its useful life
- Returns on and of all supporting assets used to generate the earnings attributable to the subject intangible (Correct answer)
- Transaction costs incurred when acquiring supporting tangible assets
- The tax benefit derived from amortizing acquired intangibles under IRC Section 197
Correct answer: Returns on and of all supporting assets used to generate the earnings attributable to the subject intangible
CACs represent the required returns on (and, for wasting assets, of) all other assets that contribute to generating the cash flows from which the subject intangible's value is isolated.
Question 6: Under ASC 350, goodwill impairment testing for public companies after the ASU 2017-04 simplification requires:
- A two-step test comparing carrying amount to implied fair value of goodwill
- A one-step test comparing the carrying amount of a reporting unit to its fair value (Correct answer)
- An annual qualitative assessment followed by a mandatory quantitative step
- Comparison of book value of goodwill to its replacement cost
Correct answer: A one-step test comparing the carrying amount of a reporting unit to its fair value
ASU 2017-04 eliminated Step 2; companies now compare the reporting unit's carrying amount to its fair value — if carrying amount exceeds fair value, the excess is the impairment loss.
Question 7: A 'with-and-without' method is most appropriate for valuing which type of intangible asset?
- Assembled workforce
- In-process research and development
- Non-compete agreements (Correct answer)
- Developed and patented technology
Correct answer: Non-compete agreements
The with-and-without method compares enterprise cash flows with and without the intangible in place and is most commonly applied to non-compete agreements, which restrict a specific party's competitive activity.
ABV Goodwill & Intangible Asset Valuation 1
Under ASC 805, which of the following best describes 'goodwill' in a business combination?