Three approaches to valuing intangible assets - CGMA
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Three approaches to valuing intanglible assets 

Three approaches to valuing intangible assets 

January 27 2012

Intangible assets (intangibles) are long lived assets used in the production of goods and services. They lack physical properties and represent legal rights or competitive advantages (a bundle of rights) developed or acquired by an owner. In order to have value, intangible assets should generate some measurable amount of economic benefit to the owner, such as incremental revenues or earnings (pricing, volume, and better delivery, among others), cost savings (process economies and marketing cost savings), and increased market share or visibility. Owners exploit intangibles either in their own business (direct use) or through a license fee or royalty (indirect use). The International Glossary of Business Valuation Terms (IGBVT) is a glossary of business valuation terms that defines intangible assets as “non- physical assets such as franchises, trademarks, patents, copyrights, goodwill, equities, mineral rights, securities and contracts (as distinguished from physical assets) that grant rights and privileges, and have value for the owner.”

Valuation assignments must estimate the value of intangibles, recognising the volatility, ongoing creation, and problems with protection and enforcement. Business valuation analysts have been independently valuing intangible assets for many years, usually in the context of an exchange between owners (transaction), for estate and gift tax purposes, or as part of a litigation assignment. Knowledge underlies the creation of value. Some of the questions that need to be answered include the following:

  • What would a willing buyer pay to employ the intangible asset?
  • What is the useful life of this asset?
  • What portion of the operating income does this asset generate?

Three methods used to value intangible assets include the market, income and cost approaches.  This tool provides CGMA designation holders with an overview of the three approaches.

The information in this CGMA tool was adapted from Understanding Business Valuation, Third Edition, Copyright © 2011 by American Institute of Certified Public Accountants, Inc.

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2 Comments


Comments
Bruce Nimmer

If 2 companies are manufacturing a similar product and company A has a lower production cost than company B as a result of creating more efficient processing systems (i.e. controlling raw material waste, managing direct labor efficiently) and has higher margins than company B ( the products are sold at the same price), can Company A capitalize its costs of developing the systems?  

Apr 17, 2012 8:25 PM
Comments
Mitchell Chosak

This is an insightful article, that covers the basics of valuing intangibles in a very informative manner.

Thank You

Mar 5, 2012 6:05 AM
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