Under IFRS 3 and ASC 805, technology-related intangible assets form one of the five classes of identifiable intangibles recognised in a purchase price allocation. They include any technology that has been developed or acquired and meets the separability or contractual-legal recognition criteria.
In practice, the technology assets identified in most acquisitions fall into three categories:
| Category | Examples | Recognition Basis |
|---|---|---|
| Developed technology | Proprietary software, algorithms, processes, formulations | Separable — could be sold or licensed independently |
| Patented technology | Granted patents, patent applications | Contractual-legal — protected by patent law |
| Unpatented technology | Trade secrets, know-how, proprietary methods | Separable — if it can be isolated and sold or licensed |
Technology assets are among the most common intangibles identified in acquisitions, yet they are also among the most difficult to value accurately because of rapid obsolescence, uncertain useful lives, and the challenge of separating technology value from the value of the team that created it.
The Relief from Royalty (RFR) method is the most widely used approach for valuing technology intangible assets. It values the technology by estimating the royalty payments the owner avoids by owning the asset rather than licensing it from a third party.
The royalty rate is the most consequential assumption in the RFR calculation. For technology assets, rates are derived from comparable licensing transactions, typically sourced from databases such as RoyaltyStat, ktMINE, and the Royalty Range database.
| Technology Type | Typical Royalty Rate Range | Key Drivers |
|---|---|---|
| Enterprise software | 10-25% of revenue | Complexity, switching costs, market position |
| Consumer software | 5-15% of revenue | Market competition, commoditisation risk |
| Patented technology | 2-8% of revenue | Patent strength, remaining term, alternatives |
| Algorithms and AI models | 8-20% of revenue | Uniqueness, data dependency, replicability |
| Process technology | 3-10% of revenue | Industry, competitive advantage |
Published royalty rate ranges are broad because they aggregate across very different transaction types, industry contexts, and deal structures. A 15% royalty rate for enterprise software may be perfectly appropriate for a mission-critical ERP platform but wildly excessive for a commodity reporting tool. Always analyse the specific characteristics of the technology being valued before selecting a rate from a range.
Not all company revenue is attributable to the technology asset. Revenue must be allocated between the technology and other value drivers (brand, customer relationships, distribution). Common approaches include:
The cost approach values technology at the cost to recreate or replace it. This method is appropriate when:
The replacement cost includes:
Estimate the fully-loaded cost of the development team over the time required to recreate the technology.
A reasonable profit margin that would motivate a hypothetical developer to undertake the recreation.
The economic cost of lost revenue during the recreation period.
Deduct for functional, technological, and economic obsolescence of the existing technology relative to a newly created replacement.
In some transactions, the technology platform is the primary earnings driver, making MPEEM more appropriate than RFR. This is common in acquisitions where the acquirer is buying the technology itself — for example, a larger company acquiring a startup primarily for its AI technology. In these cases, the technology generates the excess earnings after deducting returns on customer relationships, workforce, and other contributing assets.
Estimating the useful life of technology is one of the more challenging aspects of the valuation. Technology depreciates through obsolescence, not physical wear. The useful life should reflect the period over which the technology is expected to contribute to earnings, considering:
| Factor | Impact on Useful Life |
|---|---|
| Innovation cycle speed | Faster cycles = shorter life |
| Competitive landscape | More competitors = faster obsolescence |
| Maintenance investment | Higher maintenance = longer life |
| Platform dependency | Core platforms live longer than features |
| Regulatory requirements | Compliance mandates can extend or shorten life |
An enterprise SaaS platform that took 8 years to build might have a useful life of 5-7 years — not because the code stops working, but because competitive pressure and evolving customer expectations will require a fundamental re-architecture. A specialised algorithm embedded within that platform might have a shorter life of 3-5 years if the underlying science is advancing rapidly.
| Technology Type | Typical Useful Life |
|---|---|
| Enterprise software platforms | 5-10 years |
| Consumer-facing applications | 3-5 years |
| Proprietary algorithms / AI models | 3-7 years |
| Granted patents | Remaining patent term (up to 20 years) |
| Database technology | 5-10 years |
| Process technology | 5-15 years |
One of the most common errors in technology valuation is conflating the value of the technology asset with the value of the team that created and maintains it. Under IFRS 3, the assembled workforce is not separately recognised — its value is subsumed into goodwill. But the technology they created is separately identifiable.
The practical implication is that the technology valuation should reflect the value of the technology as it exists today, assuming a hypothetical buyer who would need to assemble their own team to maintain and enhance it. The contributory asset charge for workforce in an MPEEM valuation explicitly accounts for this separation.
Technology asset valuation requires a clear understanding of what drives the technology's economic value, how long that value will persist, and how the technology interacts with other business assets. The RFR method provides the most transparent approach when comparable licensing data exists. For technology that is the primary earnings driver, MPEEM captures the full economic contribution. The Opagio Calculator supports both approaches with built-in royalty rate benchmarks and obsolescence modelling. Model your technology valuation.
Ivan Gowan is the Founder and CEO of Opagio. With 25 years in fintech and technology leadership — including a decade at IG Group — Ivan has first-hand experience building the proprietary technology platforms that drive enterprise value. Meet the team.
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