Understanding Intangible Assets
Intangible assets are assets that have no physical presence but accrue their value over a period. Generally classified as long-term assets, Intangible assets help companies by performing operations in a unique manner thereby giving them a competitive edge. The main types of intangible assets are Intellectual properties (Trade Secrets, Patents, Trademarks, and Copyrights), licensing, Customer lists, R&D, brand equity, and goodwill.
Businesses can have an intangible value that is not reflected in their physical assets (shown in the financial statements of the company) but rather in their brand reputation. The distinctive features that make a business stand out from its competitors are part of its intangible value. We have gathered the most valuable brands in the world and presented them below:
An interesting fact to note is that the technology industry dominates the list of the most valuable brands in the world, with half of the top 10 spots. This indicates the significant impact that technology has on our daily lives.
Valuation of Intangibles in the Technology Sector
In the emerging knowledge-intensive and globalizing economy, there is an increasing trend towards the valuation of intangibles along with tangibles to assess the intrinsic worth of an organization more realistically on a long-term basis, particularly in the emerging technology sector.
Simply stated the emerging technology sector comprises the following intangible assets:
- Software: A set of instructions or programs that can be developed or acquired by businesses and can be protected by copyright and patent.
- Databases: Databases are structured repositories of information like customer, product, and transaction data, potentially safeguarded by trade secrets and contractual confidentiality agreements.
- License Agreements: License agreements are contracts that authorize the use of intangible assets, such as software, databases, patents, or trademarks, specifying terms like duration, scope, fees, and royalties, serving as a source of revenue or cost for businesses, depending on their role as a licensor or licensee.
- Patent Technology: Patent technology refers to innovation protected by exclusive rights granted by intellectual property offices, providing businesses with a competitive edge by prohibiting unauthorized use or replication.
Methods of Valuation for Intangibles
To arrive at a “fair” value for a specific intangible, the valuation methodologies are classified under the following three categories:
- Cost Approach: This approach establishes the present replacement cost of an intangible asset. It serves as a valuable benchmark, especially for easily replicable assets. However, it may not always align with actual market valuations, as it predominantly reflects historical costs.
- Market Approach: This method assesses the worth of intangible assets by analyzing prices from real transactions. Utilizing ratios like revenue, it derives market multiples. This approach necessitates a comprehensive understanding of transaction specifics and demands benchmarking against factors such as competitive positioning and future growth potential.
- Income Approach: Regarded as the most precise method, the Income Approach determines an intangible asset’s value based on its future economic returns. This evaluation involves quantifying the asset’s impact on cash flows when integrated with other assets. It requires a thorough examination of a business’s financials, organizational structure, operational processes, identification of value drivers, and the quantification of their influence.
However, not even one method of valuation could meet the requirements under all situations. A basket of techniques needs to be used to arrive at a fairly reliable estimate. The most appropriate strategy so far appears to be to compute the value as per the various methods and realize proceeds based on the “best value”, yielding the maximum proceeds, which is very subjective.
