MEEM and Contributory Asset explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
The multi-period excess earnings method values an intangible asset by projecting the after-tax cash flows of the entity or combined asset group and deducting contributory asset charges — the economic rent on the working capital, fixed assets, assembled workforce and other intangibles that support the asset — leaving the incremental cash flows attributable to the asset being valued.
The five steps
- Obtain the projections for the entity or the combined asset group over the remaining useful life of the intangible asset, to determine the future after-tax cash flows expected to be generated.
- Analyse the projections and underlying assumptions to assess the reasonableness of the cash flows.
- Deduct contributory asset charges (or economic rents) from the total net after-tax cash flows, to obtain the incremental after-tax cash flows attributable to the intangible asset.
- Discount those incremental after-tax cash flows to present value at an appropriate discount rate.
- Add a tax amortisation benefit where appropriate.
Contributory assets — what they are
Contributory assets are assets that assist or support the intangible asset being valued to generate cash flows, and are used in combination with it.
The contributory asset charge (CAC) refers to the return on assets supporting the cash flow generation of the subject intangible. Contributory assets could be in the form of:
- working capital;
- fixed assets;
- assembled workforce; and
- any other intangible asset so considered and valued.
The assembled workforce cannot be recognised as a separate identifiable intangible asset — it fails the identifiability criteria. But it plainly contributes to generating the cash flows.
MEEM resolves that by bringing it in as a contributory asset. The workforce is valued for the purpose of computing a charge against the cash flows, without ever being recognised as an asset in its own right. Omitting it from the CAC set overstates the value of the subject intangible.
Computing the charge
The material sets out the mechanics:
- the CAC should be considered for all assets, excluding goodwill, that contribute to the realisation of cash flows for the intangible asset being valued;
- charges are based on the assets' respective fair values;
- an appropriate rate of return on each asset needs to be determined and applied to the revenues to arrive at the CAC; and
- the rate of return depends on the nature of the asset and is considered on a post-tax basis.
Different assets carry different required returns — working capital a low one, a specialised intangible a high one. Applying a single blended rate across the contributory asset set is a simplification the method does not support.
Why goodwill is excluded
Goodwill is the residue — the value not attributable to identified assets. Charging a return on it would deduct from the subject asset's earnings a rent on something that has no independent existence, and would circularly reduce the very value being measured. The material is explicit that CACs cover all assets excluding goodwill.
Where MEEM fits
MEEM is the natural method for the primary income-generating intangible in a business — typically customer relationships, or sometimes technology — because it starts from the whole entity's cash flows and strips out everything else.
That is also its limitation. It works for one asset at a time. Applying MEEM to two intangibles in the same business double-counts, because each computation assumes the other is a contributory asset. Where a second customer-based intangible needs valuing after MEEM has been used for a more significant asset, the distributor method is the variation designed for that situation.
Compliance checklist
- Project over the remaining useful life of the subject asset, not the business.
- Identify every contributory asset, including the assembled workforce.
- Exclude goodwill from the charge.
- Base charges on fair values and use an asset-specific post-tax rate of return.
- Apply MEEM to one intangible; use the distributor method for a second customer-based asset.
- Document the reasonableness assessment of the projections.
- Consider the tax amortisation benefit.
Common mistakes
- Omitting the assembled workforce from contributory assets because it is not a recognised intangible.
- Charging a return on goodwill.
- A single blended rate across all contributory assets.
- Applying MEEM to two intangibles in the same business.
- Using pre-tax rates for the charge.