Certified Valuation Analyst CVA Valuation of Intangible Assets 1 — Questions and Answers
Question 1: Under the purchase price allocation (PPA) process in business combinations, intangible assets are recognized separately from goodwill when they:
- Arise from contractual or legal rights, or are separable from the business (Correct answer)
- Are internally generated by the acquirer
- Have a useful life of less than one year
- Relate only to tangible property
Correct answer: Arise from contractual or legal rights, or are separable from the business
ASC 805 requires separate recognition of intangibles that meet the contractual-legal or separability criteria, with remaining unallocated value classified as goodwill.
Question 2: The Relief from Royalty method is most commonly used to value:
- Trade names and trademarks (Correct answer)
- Customer relationships
- Non-compete agreements
- In-process research and development
Correct answer: Trade names and trademarks
The Relief from Royalty method values intangibles by estimating the royalty payments the company is 'relieved' from paying because it owns the asset, most naturally applied to trademarks.
Question 3: The Multi-Period Excess Earnings Method (MPEEM) is primarily used to value:
- A primary intangible asset driving business value, such as customer relationships (Correct answer)
- Real property associated with the business
- Short-term supply contracts with fixed pricing
- The assembled workforce
Correct answer: A primary intangible asset driving business value, such as customer relationships
MPEEM values the primary intangible by attributing to it the residual earnings after compensating all contributing assets (charges), making it well-suited for customer relationships.
Question 4: Contributory asset charges (CACs) in the MPEEM are used to:
- Remove the return on other assets so that only the earnings attributable to the subject intangible remain (Correct answer)
- Add back depreciation on tangible assets to normalize earnings
- Increase the discount rate applied to the intangible asset
- Estimate the replacement cost of the intangible asset
Correct answer: Remove the return on other assets so that only the earnings attributable to the subject intangible remain
CACs represent the required returns on all contributing assets (working capital, fixed assets, other intangibles), stripping them out to isolate the subject intangible's earnings contribution.
Question 5: Goodwill in a business combination under GAAP is defined as:
- The excess of the purchase price over the fair value of identifiable net assets acquired (Correct answer)
- The present value of future earnings of the acquired company
- The book value of the target company's equity at acquisition
- The fair value of customer lists and trade names combined
Correct answer: The excess of the purchase price over the fair value of identifiable net assets acquired
Goodwill is a residual — the purchase price paid beyond what can be allocated to individually identified and measured assets and liabilities.
Question 6: The useful life assigned to a customer relationship intangible in a PPA is typically based on:
- Historical customer attrition rates and expected revenue decay patterns (Correct answer)
- The statutory copyright or patent term
- The acquirer's fiscal year end for accounting convenience
- The age of the oldest customer on the acquired company's books
Correct answer: Historical customer attrition rates and expected revenue decay patterns
Analysts model expected customer revenue decay using historical retention and churn data to estimate how long the existing customer base will generate above-market returns.
Certified Valuation Analyst CVA Valuation of Intangible Assets 1
Under the purchase price allocation (PPA) process in business combinations, intangible assets are recognized separately from goodwill when they: