Intangible Assets - Details

Intangible Assets: A non monetary asset that manifests itself by its economic properties. It does not have physical substances but grants rights and privileges to its owner that usually generate income.

Intangible Asset is a broad term that refer to any set of rights or nonphysical resource that provide an advantage to the owner.

This definition of Intangible Assets in general includes both intellectual property and goodwill.


Types of Intangible Assets
An intangible asset can be either identifiable or unidentifiable.

  • Marketing-Related Intangible Assets
  • Customer-Related Intangible Assets
  • Artistic Related Intangible Assets
  • Contract-Based Intangible Assets
  • Technology-Based Intangible Assets

 


Basis of Intangible Assets Valuation

  • Market Value Basis of Valuation
  • Bases other than Market Value

 


Purposes of Intangible Assets Valuation

  • Acquisitions, merger and sales of businesses or parts of businesses
  • Purchases and sales of intangible assets
  • Reporting to tax authorities
  • Litigation
  • Financial reporting
  • IFRS reporting purposes

 

Valuation Approaches and Methods


All intangible asset valuation methods fall within one of the three valuation approaches.

  • Market Comparison Approach
  • Income Approach
  • Cost Approach


Intangible asset becomes valuable only when it is incorporated with value generating factors, thereby, any attempt to separate the intangible asset itself from the mentioned factors will make the intangible asset possess no value. Value of some types of intangible asset depends largely on company’s strategic marketing plan, company’s customer base, company’s artistic creativity, concessions that the company is engaged in or company’s technological progress.

 

Intangible Assets Valuation

Valuation Method of Intangible Assets is a calculation of capitalization rate and risk factors of the intangible asset through income approach method.

  • V = I/R
  • V = Value of Intangible Asset
  • R = Capitalization Rate
  • I = Net Cash Flow Generated by The Intangible Asset

 

There are 5 factors to take into calculation for discount rate.

  • Future Cash Flow Forecast
  • Year to Maturity
  • Risk Free Rate
  • Level of Fluctuation in Value of the Asset
  • Other Specific Conditions such as Market Illiquidity or Non-Perfect Market Competition

 

Relating Risk Factors

  • Production Cycle of the Product
  • Market and Customer Acceptance
  • Technological Changes
  • Regulator Dependent Business
  • Retaliation from Competitors
  • Competitive Pricing Dependent Business
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