Valuation is the process of estimating what something isworth. Items that are usually valued are a financial asset ofliability. Valuation can be done on assets (forexample, investments in marketable securities such asstocks, options, business enterprises, or intangible assetssuch as patents and trademarks) or on liabilities (e.g. bondsissued by a company). Valuations are needed for manyreasons such as investment analysis, capitalbudgeting, merger and acquisition transactions, financialreporting, taxable events to determine the proper tax liability.
An asset that is not physical in nature. An Intangible Assets include:1. Intellectual property Rights (Patents, trademarks, copyrights, software, database, trade secrets, know-how, registered designs, domain names)2. Goodwill3. Brand name An intangible asset can be classified as either indefinite or definite depending on the specifics of that asset. A company brand name is considered to be an indefinite asset, as it stays with the company as long as the company continues operations. However, if a company enters a legal agreement to operate under another companys patent, with no plans of extending the agreement, it would have a limited life and would be classified as a definite asset.
Valuation models can be used to value intangibleassets such as patents, copyrights, software, tradesecrets, and customer relationships. The valueplaced on intangibles assets, such aspeople, knowledge, relationships and intellectualproperty, is now a greater proportion of the totalvalue of most businesses than is the value oftangible assets, such as machinery and equipment.
The International Valuation Standards Board issues Guidance Notes to guide experienced valuers on the application of the fundamental principles of the International Valuation Standards (IVS) to a spcific asset type or for a specific valuation purpose. IFRS 3, paragraph 13, and IAS 38, paragraph 34, requires that intangible assets arising from a business combination are recognised at their fair value. Some companies will recognise significant benefits by electing to adopt IFRS 3 retrospectively. You should seriously consider this election if: Your intangible assets are not currently reported on the balance sheet Intangible assets, particularly brands, are key business drivers. You made significant acquisitions of brands or other intangible assets in recent years You have good historic records
Valuations of intangible assets are required for many different purposes including: Acquisitions, mergers and sales of businesses or parts of businesses. Purchases and sales of intangible assets . Reporting to tax authorities. Litigation. Financial reporting.
There is consensus among valuers that there are three mainvaluation approaches when valuing intangible assets: Cost Approach Income Approach Market Approach
Cost based methodologies assume that the value of the asset isrelated to the costs incurred in developing or redeveloping it. Whilecost is not the same thing as value, it is an acknowledged benchmarkfor certain types of assets, typically software and workforces.Cost approach is generally the least applicable approachIn the appraisal of marketing intangible assets’ and that ‘inmany instances, the cost approach will underestimate thevalue.Overestimation is also possible, for example, if softwareprojects get out of control, costs can rise, often in inverseproportion to the functional quality of the software. The costapproach may also be less applicable when the asset is oldor unique, or hard to recreate.
In this approach, the value of the subject intangible asset isestimated as ‘the present value of the future economic incomeattributable to the ownership of the asset over its expectedremaining useful life.This approach involves ascertaining the likely futureincome streams that would accrue to the owner of thesubject asset and discounting these back to the date ofvaluation to reflect the time value of money and the risksassociated with each income.It is generally held that, if the data are available, the mostuseful approach to valuing intangible assets is the incomeapproach.
In this approach assets and transactions relevant to the valuationdate involving assets that are similar to the subject asset are usedas guidelines to estimate how the market might value the subjectasset.If relevant data is available this must be considered. In thepresence of good data the market approach is one of the mostdirect and systematic approaches to valuation, but it is frequentlythe case that relevant data is not readily available.