How do you deal with the lack of comparable data for intangible valuation in the market approach?

1 Market approach

The market approach is based on the idea that the value of an intangible asset can be derived from the prices of similar or comparable assets in the market. For example, one may look at the prices paid for similar trademarks in recent transactions or licensing agreements to value a trademark. This approach can provide a reliable and objective estimate of intangible value, as it reflects the actual behavior and expectations of market participants. However, there are drawbacks to this method; finding comparable data can be difficult or impossible, especially for unique or highly specialized intangible assets. Additionally, the prices of comparable assets may not accurately reflect the specific characteristics, risks, or benefits of the intangible asset being valued, and may be affected by factors that are not relevant to it, such as synergies, strategic motives, or market conditions.

2 Income approach

The income approach is based on the idea that the value of an intangible asset can be derived from the present value of the future income or cash flows that it generates or contributes to. For example, when valuing a patent, one can estimate the future royalties or profits it will generate over its useful life, and discount them to the present using an appropriate discount rate. This approach captures the specific attributes and potential of an intangible asset, as it reflects its expected economic benefits. However, this approach also has some challenges. Estimating future income or cash flows can be uncertain and subjective, as it requires making assumptions about future market demand, competition, costs, and other factors. Choosing an appropriate discount rate can be complex and controversial, as it requires considering the risk and return of the intangible asset, as well as the opportunity cost of capital. Additionally, allocating income or cash flows to the intangible asset can be difficult or arbitrary, especially when it is part of a bundle of assets that work together to generate value.

3 How to deal with the lack of comparable data

The market approach and the income approach are two common methods used for valuing intangible assets in transfer pricing. However, one of the main difficulties of applying these methods is the lack of comparable data. Intangible assets are often unique, making it difficult to find relevant transactions or agreements to use as benchmarks. Even if there is some available data, it may not be publicly disclosed or accessible due to confidentiality or proprietary reasons. To overcome this challenge, you can use alternative sources of data such as industry reports, databases, surveys, or expert opinions to gather information about the market conditions and trends. Additionally, you can adjust the prices of comparable assets to account for differences in quality, quantity, risk, or other factors that affect the value of the intangible asset being valued. It is also recommended to use multiple methods or approaches to cross-check and validate the results of the intangible valuation and document and justify the assumptions, methods, and data used for the intangible valuation. Doing so can help you improve accuracy and reliability while complying with transfer pricing rules and regulations.