1.     Cost approach

The cost approach covers three appraisal methods:

• the trended historical cost method, which entails accounting the full array of expenses accrued during software development and updating these on the date of the appraisal. The trended historical cost method requires having project management data sufficiently reliable and justified to isolate and re-create the resources that were actually allotted to the software development;
• the coût de reproduction cost, which entails a re-creation of expenses likely to be accrued to develop the software that is to be appraised;
• the remplacement cost, which is the cost of replacement of the software by another one witch is of equal value from the viewpoint of functionalities and performance. This approach entails to draw up functional requirements and to establish human efforts cost to develop it according to present technology.

Our method combines the two first approaches: the costs related to software development resources are re-created using an appraisal and systematic, objective technical analysis of the software. The external expenses are taken into account as historic costs when the data are available.

The undisputed starting point for the appraisal method is an exacting and complete appraisal of the software components aiming to set its boundaries and exclude the appraisal of free or third-party software.

The recommended method is to:

Establish an inventory of the software, Conduct counts according to a process and criteria specific to ESALAB, Conduct a calibration on a set of sample components, Establish the reproduction cost through a calculation of the counts, Verify the consistency of the full range of appraisals/costs of reproduction/historic costs, Compare the results and ratios obtained with reference tables (benchmarking) established according to COCOMO-type methods, function points or CMM.

 

2.      Income aaproaches

Several methods are currently employed, consisting of taking the present or projected economic performance of the software as a reference. Among these:

• The value by reference to  direct capitalization

This value is equal to a capital amount witch would generate the same profit before tax than the incomes ascribable to the software possession. Capitalization is simple procedure recommended when the asset is already in use and generate steady incomes.

• The value by reference to futur earnings or the earnings "Discounted Cash Flow" method

The value of profitability by reference to future earnings is the updated value of income projected by the company directly attributable to the possession of the intangible asset. If the software is subject to an actual commercial production, future earnings will be determined by projected future economic benefits as of the date of appraisal. If commercial production for the software has not begun, however, then the appraisal will be based on projected profits – in other words, a credible “business plan” accessible to the company.   A more complete method consists of drawing up the estimated plan for future production of the software, by taking into account all future revenue, costs and investments. Indeed, it should be noted that an application is not static merchandise. It evolves with market needs and technological progress. The “maturity” of the application – which is to say the qualities making it suitable for commercialization – and the costs accrued must all be taken into account. Appraisal based on cash flow poses an issue in that the future economic performance depends for many on the ability of entrepreneurs to make the right partnership agreements or the right distribution decisions, or even the visibility of the brand, parameters which are often difficult to estimate.

In every revenue-based approach, the appraisal varies widely depending on the discount rate applied. The approach most commonly adopted to determine it is a financial one based on the Capital Asset Pricing Model (CAPM). An analysis of risk factors specific to production of the software evaluated can draw relevantly on quantification tables. These risks are – for instance – economic, commercial, financial, legal and fiscal;

 

3.      The market approach and the “fair value”"

The market value approach consists of estimating the value at which the software is saleable, with respect to comparable, recent and sufficiently numerous transactions.

In terms of accounting and financial data, the EU Accounting Regulatory Committee adopted in 2003 the principle of “Fair Value” as defined by the IAS-IFRS, in complement to the traditional approach in effect based on the traditional historic cost/accruals principle. The International Accounting Standards Committee (IASC) defines “Fair Value” as “the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction”.

According to this definition, the existence of an active market is not a prerequisite to the appraisal of the intangible.

 

Bibliography :

United Nations - Economic ans Social Council - "Evaluation of Intellectual Porperty and Intangible Assets"