Thông tư 06/2014/TT-BTC

CIRCULAR

VALUATION STANDARD No. 13

Pursuant to the Price Law No. 11/2012/QH13 dated June 20, 2012;

Pursuant to the Government’s Decree No. 89/2013/NĐ-CP dated August 06, 2013 on providing detailed regulations on implementation of several articles of the Price Law on the valuation.

Pursuant to the Government's Decree No. 215/2013/NĐ-CP dated December 23, 2013 defining the functions, tasks, entitlements and organizational structure of the Ministry of Finance;

At the request of the Director of the Price Management Department;

The Minister of Finance hereby promulgates Valuation Standard No. 13 – Valuation of intangible assets

Article 1. Enclosed herewith is the Circular on Valuation Standard No. 13 – Valuation of intangible assets

Article 2. Implementation

1. Asset valuating enterprises, asset valuers shall comply with provisions set out in the Valuation Standard enclosed herewith during the valuation of intangible assets.

2. The Price Management Department shall preside over and cooperate with relevant agencies in directing and inspecting the implementation of provisions of the Valuation Standard enclosed herewith and relevant law provisions.

Article 3. This Circular takes effect since February 21, 2014.

Difficulties that arise during the implementation of this Circular should be reported to the Ministry of Finance for amendments and supplements as appropriate./.

VALUATION STANDARD NO. 13

VALUATION OF INTANGIBLE ASSETS

(Symbol: TĐGVN 13)

(Enclosed with the Minister of Finance’s Circular No. 06/2014/TT-BTC dated January 07, 2014)

GENERAL PROVISIONS

1. Governing scope: This Standard provides instructions on valuation of intangible assets for purposes of sale, purchase, transfer, mortgaging, amalgamation and merger of businesses, capital contribution, profit division, disputes, bankruptcy proceedings and other purposes according to laws.

2. Regulated entities: Asset valuing enterprises, asset valuers (herein ‘valuers’), clients and third parties who use results of valuation as prescribed should comply with this Standard during the valuation of intangible assets.

3. Interpretation of terms:

3.1. Intangible asset refers to an asset that lacks physical substance and is capable of creating economic rights and benefits.

Intangible assets referred to in this Standard shall simultaneously satisfy following requirements:

- No physical form; however, an intangible asset may contain some physical substance which value is not considerable versus that of the intangible asset;

- Perceivable and has tangible evidence of its existence (for example: contracts, certificates, registration documentation, computer discs, list of clients, financial statements…);

- Capable of generating incomes for its owners;

- Value of an intangible asset is quantifiable.

3.2. Royalties refer to an amount of money paid to the owner of the intangible asset by an organization or individual for the right to use the asset (for example: money for the use of patents, money for franchises, mineral rights…).

4. Types of intangible assets:

- Intellectual assets and intellectual property rights according to the Law on Intellectual Property;

- Rights to bring about economic benefits for a party as detailed in a civil contract according to laws (for example: franchises, mineral rights…);

- Non-contractual relationships that bring about economic benefits for concerned parties, relationships with clients, suppliers or other subjects (for example: a list of clients, database...);

- Other intangible assets that satisfy requirements as prescribed in Point 3.1.

CONTENT OF THE STANDARD

5. Following information should be collected when carrying out valuation of intangible assets:

- Purposes of valuation;

- Characteristics of intangible assets that need valuation;

- Legal status of ownership of intangible assets (including legal or illegal ownership or use);

- Time of valuation;

- Prospective economic impacts on value of intangible assets including matters relating to economic environment (such as inflation, foreign exchange rates...) and political environment at home and abroad;

- Information specified in Point 3.1;

- Other relevant information about intangible assets that need valuation.

6. Determining the basis of valuation.

Based on the purpose of valuation, valuers shall determine whether the basis of valuation will be the market or non-market value of these assets.

In case of estimation of non-market value of an intangible asset, such relevant impacts as tax incentives, value added from combined use of to-be-valued assets and other assets of the same owner,… should be taken into account,…

7. Estimating remaining economic life:

Remaining economic life of an intangible asset shall be used in all the approaches to valuing intangible assets.

Remaining economic life of an intangible asset shall be affected by legal, economic and technological factors such as market scale and prospect, scientific and technological development, sophistication level of the intangible asset, competition from similar intangible assets…Following elements should be considered for the estimation of remaining economic life:

- Duration of protection by Law for an intangible asset as intellectual property right;

- Provisions of the civil contract in association with to-be-valued assets according to laws;

- Decisions made by the court or competent agencies on to-be-valued assets;

- Economic factors such as scale and prospects of the market for products and services in association with to-be-valued assets;

- Scientific and technological developments, new introduction of similar or better patents that result in functional and economic obsolescence of to-be-valued assets; other relevant scientific and technical elements;

- Statistical and analytical results (if any) about effective life of the group of intangible assets;

- Other elements concerning estimation of remaining economic life of to-be-valued-assets.

 An example of the estimation of remaining economic life of a patent on a modern drug:

 This patent has been registered and protected by law for the next five years. However, recent researches show another more effective drug will be successfully studied and put into production in three years. Therefore, remaining economic life of this patent is valuated as three years.

8. Approaches to valuing intangible assets comprise: Market approaches, cost approaches and income approaches. Each approach comprises various valuation methods.

Based on type of to-be-valued intangible asset, purpose and time of valuation, collectable information and figures about the to-be-valued asset, valuers shall select appropriate approaches.

During the application of valuation methods, in order to inspect reliability of valuation results, valuers shall apply sensitive analysis technique, in particular to review and scrutinize changes of valuation results when value of an important factor in a specific case varies, for example discount rate, capitalization rate,…

9. Market approach

9.1. Content of market approach:

Value of to-be-valued asset is determined on the basis of comparison and analysis of information of similar intangible asset with prices currently being transacted in the market.

Select and scrutinize characteristics, similarities of the intangible asset in comparison with the to-be-valued intangible asset, specifically:

- Intangible asset ownership-related rights;

- Financial provisions on sale, purchase or transfer of right to enjoyment;

- Areas and industries for which the intangible asset is being used in;

- Geographical elements, areas that affect the use of the intangible asset;

- Characteristics affecting remaining economic life of the intangible asset;

- Other characteristics of the intangible asset.

Valuers shall employ at least three similar intangible assets for comparison. In case only information from two similar intangible assets being currently transacted in the market is collected, results of market approach-based valuation shall be used only for inspection and comparison with valuation results from other approaches.

9.2. Reference information for application of market approaches:

- Successful transaction prices, offer prices, bid prices … of intangible assets similar to the to-be-valued asset.

- Locations and market conditions at the time of transaction, buyers and sellers’ motives, payment terms as well as other transaction-related matters.

- Necessary adjustment rate for prices and adjustment coefficient to reflect differences between to-be-valued asset and similar intangible assets.

9.3. Cases of application of market approaches:

- When information about similar intangible assets being transacted or with right to enjoyment being transferred or having transaction markets is available;

- When comparison with results of other approaches is required.

9.4. Other specific issues of market approach shall be instructed in other valuation standards of Vietnam Valuation Standard System.

10. Cost approaches

10.1. Content of cost approach:

Cost approaches to valuing intangible assets shall be based on the cost to create a new intangible asset similar to the to-be-valued asset or the replacement cost to create a similar intangible asset with the same function, uses according to current market price.

Estimated value of an intangible asset = reproduction cost (replacement cost) – accrued depreciation + manufacturer’s profits

Where, the manufacturer’s profits are determined through comparison and investigation.

Cost approach comprises two main methods: Reproduction cost method and replacement method.

10.2 Reproduction cost or replacement cost in cost approach method is composed of following costs: Costs of human force, raw materials, necessary auxiliary tangible assets to bring into play value of the intangible asset, costs of maintenance (for example: advertising costs to maintain position of brands, costs of product quality management…), costs of registration for establishment of rights to intellectual assets, costs of research and development and other appropriate costs.

10.3. Value reduced due to depreciation of intangible asset

Depreciation of intangible assets:

Depreciation of intangible assets is a portion reduced in value due to functional, technological and economic obsolescence. Physical depreciation does not apply to most of intangible assets.

Functional depreciation (depreciation caused by functional obsolescence) means the intangible asset no longer satisfies the initial function it is created to perform. Functional obsolescence may come from internal causes or changes of outside environment.

Technological depreciation (depreciation caused by technological obsolescence) means the function initially created by the intangible asset is no longer necessary although the asset is still performing such function.

Economic depreciation (depreciation caused by economic obsolescence) means the intangible asset no longer generates appropriate proportion of income to its owner when comparing average proportion of income in the economic sector in which this intangible asset plays an important role.

b) Estimation of reduced value due to depreciation:

When estimating value reduced by depreciation, following factors should be taken into account:

- Difference in research and development cost (mainly related to reproduction cost method) refers to the difference in the cost of research and construction of an intangible asset at the time of valuation and the time of creation of the to-be-valued intangible asset.

- Difference in operating cost refers to the difference in the cost of maintenance and use of an intangible asset at the time of valuation and the time of putting the asset into use. This cost should be calculated for the remaining economic life and useful life of the intangible asset.

- Economic obsolescence of an intangible asset is the difference in economic efficiency (income) in the use of the intangible asset at the time of valuation and the time of putting such asset into use.

- Remaining economic life of an intangible asset. For example: Actual age-life (in this case, useful life) of a to-be-valued asset is six years and the remaining economic life is expected to be 12 years. Thus, the portion reduced in value as a result of depreciation and obsolescence is 33.33% (=6/(12+6) x 100 %=6/18 x 100 %).

10.4 Reproduction cost method

Contents:

Reproduction cost method determines value of an intangible asset through calculation of the cost for reproduction of another asset similar to the to-be-valued asset according to current market price.

Value of an intangible asset = Reproduction cost – Accrued depreciation + Manufacturer’s profits

b) Required information:

- Information about necessary expenses for reproduction of an asset similar to the to-be-valued asset.

- Information about depreciation and obsolescence of the to-be-valued asset, or intangible assets similar to intangible assets to be valued according to market price.

c) Cases of application:

- When detailed information, figures about the cost of creation of an intangible asset is readily available, specially when found in accordance with the purpose of determining non-market value of the to-be-valued asset.

- When the intangible asset continues to be used by the owner (based on the assumptions that such owner no longer has this intangible asset, another similar intangible asset should be created for replacement and use).

- When determining damage to benefits from intangible assets caused by illegal use or breach of contract,…

- Used as an alternative complementary to other valuation methods.

10.5. Replacement cost method

Contents:

Replacement cost method determines value of an intangible asset through calculation of the cost for replacing such asset with another asset with similar functions and uses according to current market price.

Value of an intangible asset = Replacement cost – Accrued depreciation + Manufacturer’s profits

When determining value of an intangible asset using replacement cost method, valuers should consider following information: Measureable different characteristics of the replacement asset and to-be-valued asset; Time of replacement cost valuation versus time of valuation.

b) Required information:

- Information about necessary expenses for creation of an intangible asset with functions similar to the to-be-valued asset.

- Information about depreciation of the to-be-valued asset caused by obsolescence, and/or similar assets in the market.

c) Cases of application:

- When detailed information and figures about the costs for creation of the intangible asset is readily available.

- When the intangible asset continues to be used by the owner (based on the assumptions that such owner no longer has this intangible asset, another similar intangible asset should be created for replacement and use).

- When income flows or other economic benefits from use of the intangible asset cannot be determined. For example: Home-made software products, website contents, labor force.

- When determining insurance value for an intangible asset.

- Used as an alternative complementary to other valuation methods.

10.6 Other specific issues of cost approach shall be instructed in other valuation standards of Vietnam Valuation Standard System.

11. Income approach

11.1. Contents:

The income approach determines value of an intangible asset through existing value of incomes, cash flows and savings brought by such intangible asset.

The income approach is composed of three main methods: Royalties method, premium profits method, excess earnings method.

11.2. Income flows

An intangible asset may create income flows through the use and ownership of the intangible asset (for example: through collection of royalties for the use of an intangible asset), or limitations on use of the intangible asset. Below is an example about an intangible asset creating the income flow through limitations on the use of the intangible asset: An owner of an intangible asset which is an upgraded computer software product has decided to postpone commercialization of such software product in order not to affect value of previous similar software product currently being sold in the market.

When valuing an intangible asset, depending on purpose of valuation, it is possible to analyze income flow either from the use of the intangible asset or from the collection of royalties, or both.11.3. Discount rate

Discount rate according to income approach should reflect changing of currency value over time and the risks associated with income from the to-be-valued intangible asset.

Discount rate estimated on the basis of information from the market of similar intangible assets may be average net profit margin of such assets in the market.

Discount rate of the cash flow created by the to-be-valued intangible asset is normally higher than weighted average cost of capital (WACC) (because of more risks) and lower than internal rate of return (IRR). As for an intangible asset with its value having a majority in the total value of the business, it is possible to consider using WACC as the discount rates.

11.4.Royalties method

Contents:

Value of an intangible asset is calculated on the basis of existing value of royalties received by organizations or individuals that allow the use of such intangible asset.

This method gives an assumption that the organization or individual that does not own the intangible asset shall pay royalties for the use of it. Thus, this method determines value of an intangible asset through calculation of the royalties saved if such organization or individual owns the intangible asset.

Calculation of royalties, taxes, maintenance costs and other supporting costs should be consistent. Particularly, if an owner of an intangible asset is responsible for paying maintenance costs (advertising costs or research, maintenance and development costs), the royalties shall also include such costs. Conversely, if maintenance costs are not included in the royalties, they should be excluded from the royalties.

b) Required information:

- Royalty level may be:

+ Level of royalty actually received by the intangible asset owner for the transfer of right to enjoyment of such intangible asset;

+ Hypothetical royalty level that means the amount of money the user is supposed to pay to the intangible asset owner. These levels shall be calculated on the basis of royalties from the use of similar intangible assets being currently transacted in the market, or on the basis of profits from the use of the intangible asset that the user is ready to pay to the owner via an independent and objective transaction.

- Information about transactions of similar assets concerning law-protected rights, information stated in the contract for transfer of right to enjoyment of the intangible asset such as royalties, maintenance costs (advertising, upgrading of products, quality control), use duration, closing date.

- Financial statements and relevant documents

c) Cases of application:

- When necessary information and figures about royalties from the use of similar intangible assets in the market is readily available.

- When calculation of compensations for damage is required in case of a dispute.

- Used as an alternative complementary to other valuation methods.

11.5. Premium profits method

Contents:

Premium profits method determines value of an intangible asset on the basis of difference between profits received by a business in case of using and not using such intangible asset.

In this method, value of the intangible asset is estimated on the basis of difference between existing value of two discounted cash flows in case the to-be-valued asset is used to create premium income for the subject and in case the subject does not use the to-be-valued asset.

b) Required information:

Some or all of the following information should be considered prior to applying premium profits method:

- Expected profits, saved costs and future income flows created for the business when using and not using the intangible asset.

- Appropriate discount rates to predict future incomes.

c) Cases of application:

- This method may apply to intangibles that generate excess earnings and intangibles helping saving costs.

- Used as an alternative complementary to other valuation methods.

11.6. Excess earnings method

Contents:

Excess earnings method determines value of an intangible asset through existing value of cash flows supposedly derived from contributions of to-be-valued intangibles after cash flows derived from contributions of other assets are excluded.

Application of excess earnings method as follows:

- Estimate cash flows expected to be generated from the use of to-be-valued tangibles. Cash flows generated from the use of to-be-valued intangibles are determined by deducting from the expected cash flows as mentioned above the portions of the cash flow generated from the use of tangible assets, financial assets and other intangibles other than to-be-valued intangibles (herein ‘supporting assets’).

Contributions from supporting assets are sensible earnings including profits from supporting assets and compensations for initial investments for reduction in value of the assets over time. Sensible earnings generated by supporting assets are determined through following steps:

Step 1: Determine assets that make contributions to cash flows;

Step 2: Estimate value of these supporting assets;

Step 3: Determine earnings derived from supporting assets on the basis of reasonable profit ratio and value of the supporting assets.

- The remaining portion of the expected cash flow after the contributions generated by the supporting assets is deducted is then discounted to a present value. Total present value of this adjusted cash flow is value of the to-be-valued intangible asset.

In case a to-be-valued intangible asset is eligible for a discount according to laws on accounting, value of this intangible asset shall be added with some benefit expected from exemption from income tax imposed on value of depreciation of the intangible asset.

b) Required information:

Following information should be carefully considered prior to applying excess earnings method:

- The business’ cash flows generated by to-be-valued intangibles shall include income flow and other costs associated with the intangibles to be valued;

- Costs of using necessary supporting assets and associated with effective use of to-be-valued intangibles;

- Appropriate discount rate for conversion into present value of to-be-valued intangibles;

- Relevant costs and benefits (applicable tax on use of intangibles).

c) Cases of application:

- Value an intangible asset in combination with other assets in a group for generation of cash flows; In which, the to-be-valued intangible asset makes a major impact on the cash flow.

- Used as an alternative complementary to other valuation methods.

11.7. Other specific issues of income approach shall be instructed in other valuation standards of Vietnam Valuation Standard System.