Valuing specific intangible approach IPR, Brand, Human Capital03/09/2022 1 By indiafreenotes
Intangible assets are those assets in a company’s balance sheet that have monetary or business value hidden in them but are not present in the physical form. Intangible assets help companies by performing operations in a unique manner thereby giving them a competitive edge. For example, intellectual property like patents, trademarks and copyrights are types of intangible assets. All businesses can gain access to intangibles by creating intangibles or acquiring intangibles from other businesses.
The intangible value of a business can also be hidden in the brand value of a corporation. Different businesses exhibit different Unique Selling Points that can be considered part of the intangible value of a business.
There can be different reasons to value intangibles; some of them are listed below:
- Determining the Asset Value: Since an intangible asset is a non-physical asset, the value at which it has to be disclosed should be determined as accurately as possible.
- Regulatory Purposes: Determining the correct value of the intangible asset for taxation purposes, transfer pricing, taxation for mergers and acquisitions etc.
- Improving Accuracy and Reliability of Financial Communication: Informing stakeholders (Management, Employees, Shareholders, Regulators, etc) appropriately and reliably is of paramount importance in today’s day and age.
- Improving and Diversifying Access to Finance: Recognizing the worth and inherent value of intangible assets would greatly improve the chances of any company to successfully apply for financing.
- Impairment Testing: Impairment testing involves comparing an asset’s carrying amount in the balance sheet with its recoverable amount.
- Gaining competitive edge: An increase in intangibles investment may trigger an increase in total factor productivity, and therefore long-term economic growth.
Marketing-related intangible assets
- Trade marks (eg. McDonald’s logo with gold M symbol, Nike logo)
- Internet domain names (eg. www.google.com, www.yahoo.com)
- Non-competition agreements
Contract-based intangible assets
- Licensing, royalty agreements (eg. Lending a license for use)
- Leasing agreements (eg. Leasing agreement to use an asset)
- Broadcasting rights (eg. Hotstar’s right to broadcast IPL)
Technology based intangible assets
- Patented and unpatented technologies
- Software (eg. Microsoft Office)
- Secret formulas, processes (eg. Confidential code of a product)
1) Relief from Royalty Method (RRM)
In this method, value is assigned to the intangible asset based on approximate royalty rates that would be saved by owning the asset. Because the asset is owned by the Company, it doesn’t have to pay for the use of the asset. The RRM incorporates elements of both the market (royalty rates for comparable assets) and income (estimates of revenue, growth, tax rates) approaches.
2) With and Without Method (WWM)
The intangible asset’s value is determined by calculating the difference between a discounted cash flow model for the enterprise with the asset and a discounted cash flow model without the asset.
It should be noted that identification of incremental income and incremental risk to business cost of capital excluding the capital is of paramount importance here.
3) Multi-Period Excess Earnings Method (MPEEM)
The cash flows related to a particular intangible asset are discounted to calculate the present value. It is applied when the cash flows associated to a particular intangible asset can be properly determined. Software and customer relationships are examples of assets that can be valued using MPEEM.
4) Real Option Pricing
This method is used to value intangible assets that are not presently generating cash flows but are expected to do so in the future. Undeveloped patent options are one example of an intangible asset that may be valued using this method.
- Human Capital
Human capital is the umbrella term for the skills, education, experience, and value of an organization’s workforce. It’s the know-how and expertise of individuals within a company, which can bring the company value. An organization’s human capital also shows how effectively management uses resources to help employees achieve their potential.
- Relational Capital
Relational capital consists of all the valuable relationships that an organization maintains with customers, suppliers, partners, clients, and other external entities. It also encompasses brand names, reputation, and trademarks that a company owns.
- Structural Capital
Structural capital is the organization, process, and innovation capital that supports an organization’s human and relational capital. It includes culture, processes, databases, intellectual property (IP), non-physical infrastructure, hierarchy, and more. It refers to the knowledge and value that belongs to an organization’s structure and processes.