Valuation of Intangible Assets
Professional support for valuation of intangible assets
We offer professional support in the area of the valuation of intangibles. In addition to valuations of respective categories of intangible assets we carry out the purchase price allocations in acquisition transactions, including estimations of goodwill.
Intangible assets are property rights, among other things, economically usable and intended to be used for the purposes of the entity (Accounting Act of September 29, 1994).
According to International Accounting Standard 38 "Intangible Assets," an intangible asset is defined as an identifiable non-monetary asset that has no physical form. Intangible assets can occur in all spheres of business: distribution, financial services, sales and management. Typically, intangibles generate additional value, increasing the value of the business.
In business terms, intangible assets include, but are not limited to:
- copyrights and related rights
- inventions
- patents
- technologies
- trademarks and brand names
- utility designs, industrial, graphic and
- ornamental designs (logos)
- CO2 emission rights
- know-how
- concessions
- licenses
- contracts with customers and suppliers
- relationships with customers and
- suppliers
- computer programs
- Internet domains
- databases
- research and development costs
- goodwill
- human capital
The valuation of intangible assets shares many similarities with the business valuation. Three traditional valuation approaches are used in intangible asset valuation: income, cost and market. Given the frequent lack of or limited market data, typically the valuation of intangible assets focuses on using two approaches: cost and income.
The general characteristics of the three commonly accepted approaches to valuing intangible assets are as follows:
The market approach - in this approach, the value of intangible assets is estimated on the basis of comparable market transactions. Since intangible assets are rarely sold separately from a business and it is difficult to find comparable assets, direct application of this method in practice is possible only in a few cases. At the same time, it is possible to apply this approach by relying on the estimated values of intangible assets adopted in purchase price allocation (PPA) processes following a company or enterprise acquisition transaction.
The cost approach - in this approach, the value of intangible assets is estimated as the cost (expressed in present value of money) required to re-produce or re-create the valued intangible assets.
The income approach - the income approach takes into consideration potential revenues, expenses, profitability and investment expenditures related to the appraised intangible asset. This approach estimates the value of an intangible asset as the present value or capitalization of future cash flows, sales or saved costs over the period of the economic life of the intangible asset.
The income approach is perceived as the basic approach in the valuation of intangibles in the majority of cases. The income approach can take various methods depending on the unique character of the appraisal process of the intangible.
The main income methods are as follows:
- Relief from royalty method
- Cost savings method
- Multi-period excess earnings method (MPEEM)
- With and without method
- Greenfield method
When conducting a valuation using the income method, we consider taking into account the tax savings from amortization of the asset - tax amortization benefit (TAB).
