Intangible Asset Valuation: RFR, MPEEM and Incremental Cash Flow

When someone asks me what a brand is worth, I usually start with a question back: worth for what? A valuation is not a number floating in space. It is an answer to a specific question — a purchase price allocation, an impairment test, a licensing negotiation. Get the question right, and the method usually picks itself.

Start with the standards, then the story

IVS 2025, effective 31 January 2025, recognises three broad approaches to intangible assets: market, income and cost. The income approach is where most brand, IP and technology work sits, and it includes excess earnings, relief-from-royalty and premium-profit/with-and-without methods. The intangible-assets standard requires the general IVS standards to be applied alongside its additional requirements, including choosing an appropriate basis of value and method.

That last point matters more than it sounds. The method has to match the asset's cash-flow pattern and the evidence you actually have. If you cannot explain why your method fits the asset, the number will not survive scrutiny.

Relief-from-royalty: what you avoid paying

Relief-from-royalty (RFR) asks a simple question: if you did not own this asset, what royalty would you pay to use it? The royalties you avoid are the asset's economic benefit, discounted after tax over its useful life.

Simple in concept, demanding in practice. The result leans heavily on four inputs:

• Defensible revenue forecasts
• A supportable hypothetical royalty rate
• A realistic useful life
• A discount rate that reflects the risk

Change any one of those and the answer moves. That is not a flaw in the method — it is a reminder that RFR is only as good as the evidence behind those four numbers.

MPEEM: the residual belongs to the primary asset

The multi-period excess earnings method (MPEEM) is an excess-earnings method. It attributes residual cash flows to a primary intangible after deducting charges for contributory assets — the working capital, fixed assets and other support the business needs to generate those flows.

MPEEM is commonly suited to assets such as customer relationships, where the cash flows are tangled up with the rest of the business. The discipline is in the charges: supporting assets must be treated carefully, and returns that are not specific to any asset need to be handled consistently. Skip that step and you quietly overstate the subject asset.

Incremental cash flow: with and without

The incremental cash flow — or with-and-without — method compares the present value of business cash flows with the subject intangible against the value without it. The difference is the asset's contribution. IVS describes this as the premium-profit or with-and-without method.

Here is the trap. In the "without" case, remove only the economic benefits attributable to that asset. If you strip out more, you are valuing something else. If you strip out less, you are double counting.

Avoid double counting

This is the modelling control that ties the methods together. In an asset-level valuation, forecasts and contributory-asset charges should be consistent with the subject asset's role. In a with-and-without analysis, the "without" case should remove only the benefits that belong to that asset. It sounds obvious. It is also where most valuations go wrong.

Market evidence has a high bar

I am often asked why we do not simply use comparable transactions. IVS is clear: the market approach should be used only where there are arm's-length transactions involving identical or similar assets on or near the valuation date, with enough information to adjust for significant differences. That is a high bar. When it is met, market evidence is powerful. When it is not, forcing it produces false comfort.

Where this shows up: PPA and impairment

In purchase price allocation, IFRS 3 is the relevant business-combinations framework for identifying and measuring acquired assets and liabilities. The valuation work should distinguish identifiable intangibles from goodwill and support the assumptions and useful-life conclusions. I want to be careful here: the briefing behind this piece did not include the IFRS 3 text, so I am not going to state specific recognition criteria as verified fact.

For impairment, IAS 36 defines recoverable amount as the higher of fair value less costs of disposal and value in use. An impairment loss is recognised when carrying amount exceeds recoverable amount. Annual impairment tests apply even without an impairment indicator to goodwill, indefinite-life intangible assets and intangible assets not yet available for use; goodwill-containing cash-generating units are also tested annually and when indicators arise.

For readers in Hong Kong, HKFRS is the local reporting framework. HKFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027. It is a presentation-and-disclosure development — it does not change the valuation methods above.

My take

Pick the method that matches the asset's cash-flow pattern and the evidence you can defend. Document the royalty rate, the contributory-asset charges, the "without" case. Do that, and the number holds up — in a PPA, in an impairment test, and in the room where it actually matters.

For a deeper treatment, see Intangible Asset Valuation: A Comprehensive Guide to Valuing Brands, IP, Technology, and Human Capital and the companion resource at intangible-valuation.simonmak.com.