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INTANGIBLE ASSETS IN FINANCIAL MANAGEMENT
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- 2. INTANGIBLE ASSETS – What itis? An intangible asset is an asset that is not physical in nature, such as a patent, brand, trademark, or copyright and Goodwill. Businesses can create or acquire intangible assets. An intangible asset can be considered indefinite (a brand name, for example) or definite, like a legal agreement or contract. Since intangible assets have no shape or form, they cannot be held or manipulated.
- 3. Types of IntangibleAssets Intangible asset is one that has no physical form. These assets are generally considered long-term whose value increases over time and very critical to the long- term success of the business. INTANGIBLE ASSETS CAN BE CLASSIFIED INTO TWO TYPES. Indefinite: This type of intangible asset stays with the holder as long as it continues to operate, such as a brand name. Definite: This type is restricted to a limited time. A legal agreement to operate under another company's patent with no plans of extending the agreement is considered a definite intangible asset.
- 4. Types of Intangible Assets Themost common types of intangible assets—notably brands, goodwill, and intellectual property. Brands The brand is something that sets one business apart from another. This may come in the form of a logo, symbol, or brand name. Businesses commonly use marketing, design techniques, and advertising to come up with their brands. This allows consumers to easily identify a particular company. Example: most people can easily identify Apple (AAPL) just by seeing its logo.
- 5. Types of IntangibleAssets Goodwill When one company purchases another, the intangible assets associated with that transaction are considered goodwill. When a company acquires another business, any amount that exceeds the fair value of the target's net assets represents its goodwill. If the amount is above the target’s book value then it results in positive goodwill. Anything below book value is negative goodwill.
- 6. Types of IntangibleAssets Intellectual property is a type of intangible asset that is legally protected. This means it cannot be used by another business or individual unless authorized by the owner. Common forms of intellectual property include Copy Rights. Digital Assets. Franchises. Patents Trade Marks Trade Secrets.
- 7. Valuation of IntangibleAssets Need for Valuing Intangible Assets: Many companies do not understand that their trademarks, designs and other intangible property rights and assets are often more valuable than, for example, their inventories. It is not uncommon for a company’s intangible assets to be their single most valuable asset and can be used to ensure financing of the company's growth.
- 8. Valuation of IntangibleAssets valuation may become necessary when: • You plan to license out an intangible asset and you want to get an estimate of future license fees • You plan to buy or sell a business. A valuation of the intangible assets can then be helpful in achieving a better price. • Getting an accurate valuation of your intangible assets is not always easy. • How much is a trademark worth after years of marketing?
- 9. Valuation of IntangibleAssets Does your patent protect a technical solution where there is a good market basis or is the invention superfluous? A well-known trademark or a strong patent can be the true core of a company. All intangible assets are not valuable? If they do not help to create, maintain, or increase cash flow, they may not have direct value. The value of your assets may also change over time. For example, a patent can protect a unique solution, but after some time other solutions may arise that reduce the value of your patent.
- 10. Valuation of IntangibleAssets Trademarks generally increase in value the more well-known they become. The value of intangible property rights depends on the circumstances of a given time and place. It is important to analyze the intangible property right based on its use, the market and competitors. The valuation of intangible property rights is very important. A valuation indicates whether a right is necessary or not
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- 12. Recognition and Measurementof Intangible Assets as per IAS 38 and IND AS 38 The recognition of an asset as an intangible asset can only be done if an entity can prove that the asset meets the definition of an intangible asset and the recognition criteria. This requirement applies to costs incurred initially to acquire or generate an asset or those incurred subsequently. The intangible Asset will be recognized only if it is able to meet expected future growth other wise treated as expenditure only.
- 13. Valuation of IntangibleAssets as per IAS 38 & IND AS 38. According to IAS 38 and IND AS 38 Assets life is of two types. Finite Life and Infinite Life. Finite Life: the asset should be amortized over the useful life and impairment test should be done appropriate. Infinite Life: test for impairment should be done annually and whenever there is an indication that the asset may be impaired. • The following disclosure requirements are prescribed in the standards: (a) useful life or amortization rate (b) amortization method (c) gross carrying amount (d) accumulated amortization and impairment losses (e) line items in the income statement in which amortization is included
- 14. Valuation of Intangible Assetsunder IVS 210 and ICAI Valuation Standard 302
- 15. 1. The CostApproach A valuation according to this method is based on the costs required to create an intangible asset (or) what it might cost to recreate or develop a similar product or service. The method does not consider the current economic value of a product.
- 16. 1. The CostApproach Common costs tend to be: Labour, Material & Equipment, R&D, Development of prototype , Tests , Regulatory approvals, Application , Registration and granting of intangible property rights. This method assumes that a potential buyer can avoid these costs by purchasing the intangible asset.
- 17. Advantages of CostApproach Time: By purchasing the asset, the buyer can avoid wasting time on research and development. Expenses: Should the buyer instead try to develop their own technology, the buyer would need to spend at least this much. Success: A buyer may not have succeeded in developing their own technology. Protection: A buyer may not be able to protect their own technology and may also risk infringing on the rights of others. This method is suitable for the business who are in the early stages.
- 18. Draw backs ofCost Approach Market potential of a business cannot be fully weighted , since focus is on cost rather than profit. This method does not consider future value and therefore a parameter on which valuation is traditionally based is lost.
- 19. 2. The MarketValue Approach Basing the valuation of a product based on its performance on the market can be a good approach when valuing intangible assets and rights. Market valuation of intangible assets provides a good estimate of the value. The problem with this method is that it can be difficult to find published information on transfers of intangible property and rights, as they are often confidential. There are few transfers that are similar enough to provide a good comparison.
- 20. The Market ValueApproach It is unlikely that this method would be used to evaluate patents. The value of a patent is largely based on the uniqueness of the patent and therefore comparable information is unlikely to be found. Despite the difficulties, this method is objective and can provide companies with a realistic analysis of the value of an intangible asset for both the holder and the buyer.
- 21. 3.The Income Approach This method focuses on the income that an intangible asset may generate in the future. The method considers both future income, which the right can generate during its lifetime, as well as the costs of this. Risk and financial costs are also factors that have an impact. The result of this analysis is called "Net Present Value" or NPV. This method of valuing intangible assets gives a potential buyer the opportunity to consider an investment based on whether the NPV valuation is positive or negative.
- 22. The Income Approach How ever it should be noted that Income or Economic Benefit method is only an assessment of likely future events rather than actual outcomes. Draw backs of Income Methods are • It is difficult to estimate the economic life cycle of intangible assets. • It is difficult to estimate income for years to come. • Factors such as the strength of the intangible asset, the size of the potential market, competition, changes in the economic climate and the cost of registration and depending oneself against infringements of the right must be considered.
- 23. Valuation of IntangibleAssets Owing to the unique nature of intangibles, the questions of how to value intangible assets ultimately comes down to choosing the right method for valuation. The five primary valuation methods are based on the three approaches described above – the market, income and cost approaches. While valuing a particular intangible asset, one method will likely be more appropriate compared to the others.
- 24. 1) Relief from Royalty Method (RRM) In thismethod, 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.
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- 26. 2) With andWithout 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.
- 27. 3) Multi-Period ExcessEarnings 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.
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- 29. 4) Real OptionPricing 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.
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- 31. 5) Replacement Cost Method Less Obsolescence The replacement cost method establishes a value for the intangible based on the amount is would cost the Company to replace the asset. Despite of all the guidance and standards available for intangible valuations, Intangible Valuations tends to be a highly subjective activity. The evolution and evaluation of the intangible assets of a company is an integral part of the analysis of a company.
- 32. Conclusion Many technologyand service-based companies are heavily reliant on intangible assets while performing their business functions, thereby giving them immense importance currently. The real challenge in intangible valuations lies in determining how much portion of value is attributable to several tangible and intangible assets. Therefore, it should be noted that the value is within the prescribed framework under law while exercising structured and practical thinking in relation to the benefit that can be derived from intangibles. It is of no doubt that going forward, Companies that can accumulate and harness Intangibles will be able to create more value.
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- 34. Fair value VsPrice
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- 46. Key Sensitives ofDiscounted Cashflows
- 47. Discounted Cash flow–Discount Rate
- 48. Market Approach CaseStudy- Comparable Companies Method
- 49. Multiples used invaluation
- 50. Multiples computed forcomparable companies
- 51. Recap Intangible AssetMeaning Intangible Assets types Valuation basis for Intangible Assets Types of Valuation Case study
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