Approaches for Valuing Intangible Assets :

Valuation of intangible assets is a difficult exercise. The physical form of intangible assets makes it difficult to identify the future economic benefits that the organisation can expect to obtain from the intangible assets. Many intangible assets do not have alternative use and cannot be divided into components or parts for resale. Infact, intangible assets normally do not have an active market. Many times, they are not separable from the business and hence it becomes difficult to value them separately from the business.

There are three approaches used in valuing intangible assets; (i) cost approach, (ii) market value approach and (iii) economic value approach. The valuer has to select the apprpach after considering a number of factors like credibility, objectivity, relevance and practicality.

In cost approach, expenditure incurred in developing the asset is aggregated. If the asset has been purchased recently, its purchase price may be taken to be the cost.

In market value approach, valuation is made by reference to transactions involving similar assets that have taken place recently in similar markets. The approach is possible if there is existence of an active market of comparable intangible assets and adequate information in respect of transactions that have taken place recently is available.

Economic value approach is based on the cash flows or earnings attributable to those assets and the capitalisaiton thereof, at an appropriate discount rate or multiple. The valuer has to identify the cash flow-earnings directly associated with the intangible assets like the cash flows arising from the utilization of a patent or copyright, licensing of an intangible asset, etc. It is possible only if cash flows from the intangible asset are identifiable from the accounts and budgets, forecasts or plans of the enterprise.