CHAPTER 3 Professional Standards Related to Intangible Asset Appraisals INTRODUCTION UNIFORM STANDARDS OF PROFESSIONAL APPRAISAL, PRACTICE AMERICAN SOCIETY OF APPRAISERS INTERNAL REVENUE SERVICE, Section 197 Section 482 Section 170 SUMMARY BIBLIOGRAPHYINTRODUCTION The need to understand the value of intangible assets has increased dra- matically in the last ten years. Transactions encompassing the sale or li- cense of intangible assets as independent economic units are progressiv ly more common in this era of the information superhighway. Disputes involving the rights associated with and the value of intangible assets have become more intense and sophisticated. When a party to either a transac- tion or a dispute is motivated by the financial consequences of valuing an intangible asset to use one set of valuation standards versus another set of valuation standards, then the dispute may center around which set of pro- fessional standards apply. This chapter provides an overview of intangible asset valuation pro- fessional standards, the organizations that promulgate them, and the edu- cational resources available to intangible asset analysts and to the users of intangible asset analyses. Intangible asset valuation professional standards include the Uniform Standards of Professional Appraisal Practice and certain professional stan- dards of the American Society of Appraisers. In addition, some profes- sional guidance is provided by certain pronouncements of the Internal Revenue Service. We will review these standards and pronouncements in the following sections UNIFORM STANDARDS OF PROFESSIONAL APPRAISAL PRACTICE ‘The Uniform Standards of Professional Appraisal Practice (USPAP) may be re- garded as an umbrella set of professional standards that are appropriate for many types of appraisal engagements, including appraisals of real es- tate, personal property, businesses, business interests, or intangible assets. USPAP is promulgated by the Appraisal Standards Board (ASB) of ‘The Appraisal Foundation. The Appraisal Foundation is a not-for-profit educational organization established in 1987 and funded, in part, by the US. government. The goal of The Appraisal Foundation is to foster pro- fessionalism in appraising through the establishment and promotion of appraisal standards and appraiser qualifications, ‘According to the Mission Statement of The Appraisal Foundation, “the Appraisal Standards Board promulgates the generally accepted stan- dards of the appraisal profession.” The fact that these standards are, in- deed, reaching a position of general acceptance is evidenced by the fre- ‘quent references to USPAP both in court decisions and in the professional literature. ‘The USPAP provisions are generally arranged as follows: 1. An introductory section that encompasses ethics provisions, competency provisions, and a statement of definitions. 2, Standards 1 and 2, real property appraisals 3, Standard 3, review appraisals. 4, Standards 4 and 5, real estate consulting engagements. 5. Standard 6, mass appraisals for ad valorem property taxation. purposes. 6. Standards 7 and 8, tangible personal property appraisals. “ PART 1 Inteostsction to Int a7. Standards 9 and 10, business appraisals, 8, Statements on professional standards statements (SMTS)). 9. Advisory opinions (currently there are 17 advisory opinions (AOs)). 10. A comprehensive glossary. Specifically, USPAP standards 9 and 10 also address the valuation of intangible assets. Standard 9 promulgates guidelines regarding the ap- proaches, methods, and procedures for conducting an intangible asset ap- praisal. Standard 10 promulgates guidelines with respect to the reporting of the intangible asset appraisal ‘The Appraisal Standards Board publishes an updated version of USPAP annually, presently in November. (See the Bibliography at the end of the chapter for ordering information.) An outline of the content of the 1997 edition of USPAP is shown in Exhibit 3-1 ‘The Appraisal Foundation also has an Appraiser Qualifications Board (AQB). Its mission is to establish educational, experience, and examination criteria for appraisers. At the time of this writing, the AQB has established qualifications for real estate appraisers but has not yet committed to the task of establishing qualifications for intangible asset appraisers, currently there are nine AMERICAN SOCIETY OF APPRAISERS ‘The American Society of Appraisers (ASA) is a multidisciplinary profes- sional society founded in 1952. It awards accreditations in appraisal of real estate, machinery and equipment, personal property, gems and jewelry, business valuation, and appraisal review and management. Within the American Society of Appraisers organizational structure, the general dis- cipline of business valuation encompasses the subdiscipline of intangible asset appraisal. Through its Business Valuation Committee, the ASA issues the Amer- ican Society of Appraisers Business Valuation Standards. The ASA stan- dards embrace USPAP and provide some additional professional guidance with respect to the requirements for performing an intangible asset ap- praisal and for reporting an intangible asset appraisal. Exhibit 3-2 provides a summary of the ASA business valuation ac- creditation requirements and educational offerings. (See the Bibliogra- phy at the end of the chapter for information on ordering ASA materi- als.) INTERNAL REVENUE SERVICE ‘The Internal Revenue Service (the "Service”) does not promulgate profes- sional standards with respect to intangible asset appraisals. However, the Service issues a number of publications that provide various levels of pro- fessional guidance for intangible asset valuations. The United States Congress directs the U.S. Treasury Department to issue regulations to provide structure for the tax laws Congress passes. These regulations do not have the force of law, but they do present the po- sition of the Service with respect to various tax matters, including the val- uation of businesses, business interests, and related intangible assets. Reg- CHAPTER Professional Standards Related to Intangible Asset Appraisals a