Question

Suggest TWO (2) ways companies might fairly value their intangible assets.

Answer 1

Valuing Intangible Assets

Valuing intangible assets can be done using one of basic methods:

1. Cost of creation

2. Capitalization of income or savings.

Rule-of-Thumb formulas do exist for some assets in some industries but are better for providing an estimate of value to be compared with the value determined by the other methods.

1. Cost of Creation :-

The cost of creation method of valuing intangible assets relies on calculating what it would cost another business to duplicate a given asset today. This method does not measure an asset’s future impact on profits; it merely looks at what it would cost to create the asset from scratch at a particular point in time.

Assets that may be valued using the cost of creation method include:

Internal Software;

Patents;

Trademarks;

Copyrights;

Subscriptions;

Customer lists; and

Service contracts

2. Capitalization of Income or Savings Method :-

The capitalization method measures the future benefits intangible assets will bring to a company, when those benefits will be generated and for how long. The capitalization rates used in this method should reflect the risk associated with the intangible asset being valued.

In addition to the income an intangible asset may bring to a company, the benefits may also include savings to the company as a result of owning the asset, or not having to pay a royalty to someone else who owns the asset or of efficiencies generated by the asset.

Assets that work well with this method include:

Trade names;

Customer lists;

Commercial Software;

Patents;

Trademarks; and

Brand names.

The capitalization method works well for all of these assets when they are relatively new. As they come closer to the end of their economic usefulness, however, other methods of valuing them may become more appropriate.