Question

Since intellectual property is considered an intangible asset, describe the standard approaches to it valuation. Name at least two ways in which the accounting for tangible assets is different than it is for intellectual property.

Answer 1

Intangible assets are those assets which do not have physical existence, in other words we can say that assets which can not be touched and seen are known as intangible assets, although these assets also generate revenues for the company in long-period of time that is why these are also known as assets for the company.

Folowings are the common approaches for valuation of intellectual property;

1. Income Approach;

Intangible asset (intellectual property) is valued on the basis of income generated by such assets. Under this approach, appraiser determines the potential future benefits from the asset as well as the inherent risks of realizing the benefits. And finally such assets is valued on a suitable amount.

2. Cost approach;

Under this approach we focuss on the relevant costs incurred for development of Intangible asset (intellectual property). In other words we can say that actual costs incurred for bringing such intangible asset to the company is considered for valuation.

3. Market approach;

Under this approach, appraiser collect relevant information from the market to value intangible asset (intellectual property). Appraiser focuss on collecting relevant comparable information from market which helps in valuation of such intangible assets.

Accounting for tangible assets is different from intellectual property;

Tangible and intangible both are very valuable assets for a firm or company but accounting treatment of both are different.

1. In accounting tangible assets are depreciated whereas intangible assets are amortized. Apart from this valuation of tangible assets are simple in compare to intangible assets.

2. Tangible assets can be easily valued with the help of liquidation method because due to physical existence these types of assets can be liquidated easily in compare to intangible assets. Intangible assets can not be easily liquidated that is why liquidation method of valuation is not suitable.