The relief from royalty method is a proven approach to valuing intangible assets including brands, patents, and technologies. In the United States, it is used in purchase price allocations, tax compliance, and transfer pricing to establish fair market values.
How the Method Works
The concept is straightforward: if a company did not own its intangible asset, it would need to pay royalties to use it. The value is measured by the savings from not paying these royalties.
Steps in application:
Set a market-based royalty rate based on comparable license agreements.
Apply the rate to an appropriate base, such as net revenue tied to the asset.
Discounting these savings to present value provides the asset’s worth.
Key Elements for Reliable Valuations
Accurate forecasts of revenue and expenses linked to the intangible.
Benchmarks from relevant licensing deals.
A discount rate reflecting cost of capital.
Careful market analysis and data selection are essential to credibility.
IFRS vs. US Tax Considerations
IFRS reporting: The goal is transparency for capital markets, allowing reasonable flexibility in selecting a royalty rate.
Tax compliance: US tax law enforces stricter requirements, emphasizing the arm’s length principle to avoid artificial pricing. Detailed documentation is often required to support selected rates and prevent transfer pricing disputes.
Why It Matters for US Companies
This method provides a practical, transparent way to quantify the value of intangible assets. Its effectiveness depends on robust data and compliance with both financial reporting and tax standards.
Aspen Valuations works with US companies to deliver relief from royalty valuations that stand up to audit, investor scrutiny, and tax authority review.