Valuation Methods for Intangible Assets

Today, Russian organizations somewhat underestimate the role of intangible assets (hereinafter - intangible assets) in the composition of their own property complexes. For example, insufficient attention is paid to depreciation and valuation of intangible assets. We conducted an analysis of existing assessment methods and the preferences of their application to identify the quality of their various types, as well as relevant pros and cons. However, it is advisable to begin to consider this issue directly with the term and its definition.

Intangible assets: concept

Assessment of intangible assets assumes the existence of an object that needs to be evaluated. That is why it is so important to be able to classify it. The situation is complicated by the fact that intangible assets are not always a definite concept, but very capacious. We will try to analyze it in more detail, and after that we will move on to studying the types of valuation of intangible assets.

One of the reasons for the emergence of intangible assets is the emergence of market relations. It is worth noting that the presented variety of funds is a relatively new economic category. The following assets may be recognized by intangible assets:

• Applicable in the activities of a legal entity or structure.
• Identifiable (in other words, endowed with features distinguishing this object from other similar ones) and not possessing a material form.
• Able to bring future benefits to the structure in economic terms.
• Their useful life is more than a year.
• Their value can be measured subject to a sufficient level of reliability. That is, the valuation of intangible assets is made taking into account the availability of documented value confirmation, as well as those costs associated with the creation or acquisition of intangible assets.
• If there is documentation confirming the rights of the copyright holder.

It is important to know that in the absence of at least one of the criteria listed above, realized costs cannot be recognized as intangible assets - they are considered expenses of the organization. In the process of studying the valuation and classification of intangible assets, it is necessary to consider that today it is customary to distinguish the following types of intangible assets:

• Deferred costs.
• Objects of intellectual form of ownership.
• The price of the company.
• Rights to use natural resources.

Among other intangible assets, it is worth noting licenses for the implementation of a particular type of activity aimed at carrying out quota and foreign trade plan operations, for applying the experience of specialists in certain areas, as well as for the right to trust property complexes.

Accounting and valuation of intangible assets

Typically, the assessment of intangible assets is necessary in the process of solving specific problems related to the application of property rights to them. It is due mainly to the intended purpose. The valuation of intangible assets and intellectual property is carried out in accordance with the Methodological Recommendations for the accounting of intellectual property as part of intangible assets and the assessment of value, as well as the Examination Procedure for the validity of the valuation of intellectual property as part of intangible assets. It should be added that these guidelines are approved by a joint order of the State Patent Committee, the Ministry of Economy, the Ministry of Finance, the State Committee for Science and Technology. Among the papers required for the assessment, it is advisable to note the following:

• Characteristics of the valuation of intangible assets.
• Title documentation for objects. These can be certificates, patents, standard or copyright contracts, license agreements, and so on.
• The period of use of the object of valuation of intangible assets.

In the case of a more detailed acquaintance with the objects, an appraiser’s request for other additional information and documents is created, which depends on the specifics, main goals and composition of the objects. It is important to keep in mind that intangible assets of an enterprise are valued using the same types of value as other property complexes. In other words, the valuation of intangible assets in the balance sheet is carried out at market, replacement, collateral, investment, initial, insurance and taxable value. If a question arises regarding the initial cost, it should be added that it is on this basis that an intangible asset is initially recorded on the balance sheet of the structure. This indicator consists of the costs of the formation or acquisition of intangible assets, as well as its refinement, as a result of which the asset can be used at the enterprise. It is advisable to consider the definition of historical cost separately.

How to determine the initial value of assets

In the process of studying the concept, classification and valuation of intangible assets, it is important to consider the definition of their initial cost. This is most conveniently done using the table below.

Valuation of intangible assets and market value

You need to know that the valuation of fixed assets and intangible assets for collateral is based on market value. This concept must be understood as the most probable price that intangible assets must achieve in an open and competitive market, subject to current conditions, conscious actions of the buyer and seller, as well as all factors related to fair trade, without the influence of incentives of an illegal nature. In this case, it is important to observe a number of conditions:

• Motivations of the seller and the buyer are determined by typical features.
• They are well consulted, informed and act in accordance with their opinion, taking into account their own interests.
• NMA is put up for sale for a sufficient period of time.
• Payment is implemented in cash.
• The price is normal. She was not affected by the specific conditions of sale and financing.

In our case, it is important to distinguish between the collateral value of intangible assets and the amount of the loan loaned against the security of assets. These concepts have some differences both in size and in meaning. The valuation of intangible assets and intellectual property, according to the criteria of the market, is carried out based on the parameters of intangible assets (this also includes the income rate of this market). However, the size of the loan (although it was secured by a specific intangible asset) is determined based on the parameter of the financial situation. This takes into account the level of risk relevant to the financial market. That is why the amount of credit is determined by a specialist on this issue, and not by an expert appraiser.

The insurance value of intangible assets is calculated on the basis of the replacement costs of the asset at risk of destruction. Based on this indicator of this type of asset, insurance payments, amounts and interest are revealed.

The cost of intangible assets for the implementation of taxation purposes is determined on the basis of replacement or market value. It is important to add that extremely accurate results are relevant when designating the market value of intangible assets.

It should be noted that in practice, it is often necessary to calculate the value not of assets, but of transfer of rights to use them. In other words, it is required to identify the value of the license agreement for a specific asset. Here, this indicator mainly depends on the conditions of the operation and volume.

Income valuation method

Having dealt with the main provisions, we turn to the methods of valuation and depreciation of intangible assets. It is important to keep in mind that for a practical assessment of the value of assets, specialists usually recommend three methods: costly, comparative and profitable. They are also used in the valuation of other types of assets. First, consider the revenue method for assessing intangible assets of an enterprise. Accordingly, the value of an intangible asset object is taken at the level of the actual value of the pluses that the structure has from its use.

An example in this case is the royalty exemption methodology, which is used to assess the value of licenses and patents. Royalty should be understood as periodic deductions to the seller for the use of intellectual property. As a rule, royalties vary from 5 to 20 percent of additional profits received by an enterprise that has purchased an intellectual product. It is worth noting that royalties can reach 50% if the intellectual property serves as the basis for a new technology or product.

Classification of the income method

It is important to understand that for the income method of valuation of intangible assets (intangible assets) there are two extremely common methods:

• Direct capitalization.
• Discounted income.

These methods are applied to any kind of property, therefore, they are universal. The last of the presented methods involves the conversion in accordance with certain rules of future income that the investor expects in the current value of the estimated intangible assets. It is worth adding that the following components are included in future earnings:

• Periodic cash flow, which is considered to be income from the exploitation of intangible assets over the period of ownership. We are talking about the net income of the investor, which he receives from the ownership of property, of course, net of income tax in the form of rents, dividends and so on.
• Cash receipts from the sale of intangible assets at the end of the ownership period. In other words, this is the future proceeds from the resale of the asset (minus those costs that are appropriate when completing the transaction).

For an absolute understanding of the discounted income methodology, it is advisable to touch on the concepts of accumulation, compound interest, annuity and discounting. In accordance with the rule of compound interest, invested capital self-grows. In this case, it is possible to indicate a certain amount (rate) of income that determines the growth of a unit of capital after a specific period (month, quarter, year). In the methodology of discounted income, the norm is called the discount rate.

The direct capitalization technique is relatively simple, in which its main and only advantage. This approach is static, as it is tied to the information of the single most characteristic year. That is why special attention is required when choosing indicators of capitalization ratios and net income. You should know that the calculation of the cost of intangible assets with the help of the above methodology is performed in three successive stages:

• Calculation of net income relevant every year.
• The choice of coefficient. It is worth adding that the capitalization ratio must be associated with the previously indicated indicator of income to be capitalized.
• Calculation of the current value of intangible assets.

Comparative method

In the process of studying the composition and valuation of intangible assets, it is important to indicate a comparative valuation technique. It is used based on information (relating to recently completed transactions), comparative with similar intangible assets. This approach is used for those types of assets, transactions on which are often carried out in the market. The initial data for calculating the value of the valuation object are the selling prices of similar goods. It is worth noting that the methodology is based on the principle of substitution, according to which a rational investor will not pay more for a certain object than an analogous product with the same level of usefulness. Consider the steps of using a comparative trip.

In what sequence is the comparative method carried out?

Currently, a comparative methodology distinguishes a number of such stages:

• Market analysis and collection of information about transactions with similar objects.
• Data checking. Information should not be distorted by extraordinary circumstances that may accompany the completed transactions.
• Comparison of the valuation object with each analogue, identification of differences in accordance with consumer characteristics, dates of sale, the presence of additional elements, location and so on.
• Calculation of the value of intangible assets by adjusting prices for similar assets.

Cost method

You need to know that on the basis of the cost approach, the cost of reproduction is determined. When applying this technique, intangible assets are estimated as the sum of the costs of their formation, acquisition and further implementation. Despite the fact that when using the presented method, the estimated cost can differ significantly from the market (because there is no direct relationship between utility and costs), there are a considerable number of cases when this approach is justified. For example, in such situations:

• Calculation of tax on property complexes.
• Realization of insurance goals in relation to individual components of property.
• Judicial division of property between owners.
• Sale of property complexes at open tenders (in other words, at auction).
• Accounting for fixed assets.
• Revaluation of fixed assets.

Conclusion

Today, business in the world is undergoing significant changes in favor of the owners of intangible assets. Thus, different structures organize systems for searching, filtering and generating useful ideas, many venture companies are formed, intangible assets are laid down in many-sided investment plan projects, and data systems and publications advertise new highly effective ideas.

The methodology for assessing intangible assets with the use of royalties implies a mandatory knowledge of the entire life of the object, which can hardly be real. Moreover, this approach does not allow a reliable way to calculate profit over the entire life cycle, since it is impossible to justify the expected aging of an intangible asset in moral terms. That is why the use of royalties for calculating the value of intangible assets is inefficient.

More reasonable is the calculation of the value of intangible assets, provided that the mass of profit is applied for a certain period of time. However, the profit from the sale of these assets, it is desirable to divide equally between the buyer and seller of intangible assets for a certain period, as well as between the owner of the assets and the manufacturer of the product.