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Intangible value: delineating between shades of gray: how do you quantify things you can't feel, see or weigh?


* Intangible assets Intangible Asset

An asset that is not physical in nature.

Examples are things like copyrights, patents, intellectual property, and goodwill. These are the opposite of tangible assets.
 are a big part of contemporary business, and many executives think innovation and related intangible assets now represent the principal basis for growth. CPA/ABVs and CFOs need to be able to value intangible assets for reasons that include the sale of a business, financial reporting, litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute.

When a person begins a civil lawsuit, the person enters into a process called litigation.
, licensing, bankruptcy, taxation, financing and strategic planning Strategic planning is an organization's process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy, including its capital and people. .

* Most guidance relating to relating to relate prepconcernant

relating to relate prepbezüglich +gen, mit Bezug auf +acc 
 the recognition and valuation of intangible assets comes from accounting and tax regulation. Congress and FASB FASB

See: Financial Accounting Standards Board


See Financial Accounting Standards Board (FASB).
 have pushed for greater disclosure and clarity in recent legislation.

* CPA/ABVs and other valuation analysts engaged to identify and value intangible assets must possess a broad base of knowledge on valuation, knowledge of the relevant industry and sound judgment to support their decision making.

* Criteria for the identification of intangible assets include the following: legal existence and protection (that is, it may be identified apart from goodwill if it arises from contractual or other legal rights), private ownership, transferability, and evidence of its existence such as a contract, license, registration, listing or documentation. Most intangible assets fall into one of five categories: marketing-related, customer-related, artistic-related, contract-related or technology-related.

* One popular methodology used to value intangible assets is the discounted cash flow methodology, which typically is used to value assets such as technology, software, customer relationships, covenants not-to-compete, strategic agreements, franchises and distribution channels. Under this methodology, the value of an asset reflects the present value of the projected earnings the asset will generate. Other methodologies can be used, too.

* It's a good idea to value an intangible asset using multiple approaches, as applicable, for example to capture the historical development cost, the future economic benefit and any other components that may have a material effect on the final value such as capital charges, functional and economic obsolescence ob·so·les·cent  
1. Being in the process of passing out of use or usefulness; becoming obsolete.

2. Biology Gradually disappearing; imperfectly or only slightly developed.
, product sales cycles, synergistic synergistic /syn·er·gis·tic/ (sin?er-jis´tik)
1. acting together.

2. enhancing the effect of another force or agent.

 opportunities and tax issues, to name a few.


Intangible assets play a critical role in business today. Many executives believe they have replaced fixed assets fixed assets nplactivo sg fijo

fixed assets nplimmobilisations fpl

fixed assets fix npl
, the historical business-growth benchmark, as the key to a company's competitive sustainability. Many even think innovation and related intangible assets represent the principal basis for growth. While it is easy to argue that intangible assets are valuable, it is not so easy for CPA/ABVs and other valuation analysts to accurately capture a value for them. So how do you quantify something you can't feel, see or weigh? In this article, we attempt to answer the question of how CPA/ABVs can best identify and value these types of assets.


Businesses need a systematic method for analyzing the value of intangible (nonphysical) assets for reasons that include financial reporting, litigation, licensing, bankruptcy, taxation, financing and strategic planning, among others. Such assets include franchises, trademarks, patents, copyrights, goodwill, equities, mineral rights, securities and contracts granting rights and privileges of value to the owner. So far, most guidance and literature relating to the recognition and valuation of intangible assets come from accounting and tax regulations. For instance, FASB requires purchasers of a business to allocate the total consideration paid in a business combination or net asset transfer to the acquired assets and liabilities according to according to
1. As stated or indicated by; on the authority of: according to historians.

2. In keeping with: according to instructions.

 their fair values.

Congress and FASB have pushed for greater disclosure and clarity in recent legislation such as the Sarbanes-Oxley Act See SOX. , FASB Statement FASB Statement

A standard set by the Financial Accounting Standards Board regarding a financial accounting and reporting method. Essentially, FASB statements determine the acceptable accounting practices that Certified Public Accountants use in reporting
 no. 141, Business Combinations, and FASB Statement no. 142, Goodwill and Other Intangible Assets. In particular, statements no. 141 and no. 142 give specific guidance on defining and measuring intangible assets. Here we will focus on some of the methods and approaches these standards suggest as well as explore other professional practices.


Client companies and their valuation analysts sometimes have difficulty simply identifying the intangible assets companies possess or have acquired in a recent business combination, let alone assigning a reasonable value to those assets. Often management will avoid the entire exercise of valuing intangibles because it involves so much subjectivity Some managers argue that, while intangible assets may be an essential component in their businesses and necessary to sustain a competitive advantage, there is little incentive to identify such assets because once they are recognized they will have to be amortized over their useful lives and, subsequently, will have a negative effect on earnings.

Nor does the financial community have a large body of clear guidance on how best to recognize and value intangible assets. The available guidance offers many viewpoints and methodologies, which are informed by the background of the writer, the type of intangible asset being valued and the purpose of the valuation. CPA/ABVs and other valuation analysts engaged to identify and value intangible assets must necessarily possess a broad base of knowledge on the topic, knowledge of the relevant industry and sound judgment to support their assumptions and methodologies.


Most identifiable intangible assets fall into one of five categories: marketing-related, customer-related, artistic-related, contract-related or technology-related. There are numerous accounting, legal and tax-related definitions of an intangible asset. However, most of these definitions identify intangibles using several similar criteria. Regulatory and accounting literature in particular specifies that an intangible asset possesses the following characteristics: legal existence and protection, private ownership, transferability, and evidence of its existence (such as a contract, license, registration, listing or other documentation).

Under Statement no. 141, to recognize an acquired intangible asset apart from goodwill, one of two criteria needs to be met (either or both criteria can meet the requirements). The first test, which is known as the contractual/legal test, states that an intangible asset may be identified apart from goodwill if it arises from contractual or other legal rights. The second criterion is the separability sep·a·ra·ble  
Possible to separate: separable sheets of paper.

 test, which states that if an intangible asset is capable of being separated or divided from the acquired entity (that is, it can be sold, transferred, licensed, rented or exchanged regardless of whether there is an intent to do so) it should be identified as an intangible asset. For example, technology is typically developed in-house and thus does not meet the contractual test; however, it can be separated from the acquired entity and is frequently licensed, rented or sold from one entity to another in the course of general operations.


Once an intangible asset has been identified, it needs to be valued. Despite intangible assets' lack of physical substance and relationship to other assets other assets

Assets of relatively small value. For financial reporting purposes, firms frequently combine small assets into a single category rather than listing each item separately.
, which makes them difficult to isolate and measure, there are several methodologies to value an identified intangible asset. We will briefly highlight four of the most common methodologies (see sidebar (1) A Windows Vista desktop panel that holds mini applications (gadgets) such as a calendar, calculator, stock ticker and Vonage phone dialer. It is the Windows counterpart to the Dashboard in the Mac. See Windows Vista and gadget.  "Valuing Intangible Assets--a Fast-Growing, Demanding Niche").

Discounted cash flow. One of the most popular means to value intangible assets is the discounted cash flow methodology. This method typically is used to value some of the more widely known intangible assets such as technology, software, customer relationships, covenants not-to-compete, strategic agreements, franchises and distribution channels. Under this methodology, the value of an asset reflects the present value of the projected earnings that will be generated by the asset after taking into account the revenues and expenses of the asset, the relative risk of the asset, the contribution of other assets, and a discount rate that reflects the time value of invested capital.

Relief-from-royalty. Another commonly used methodology is the relief-from-royalty approach. This methodology often is used to value trade names and trademarks. Under this method, the value of an asset is equal to all future royalties that would have to be paid for the right to use the asset if it were not acquired. A royalty rate is selected based on discussions with management regarding, among other factors, the importance of the asset, effectiveness of constraints imposed by competing assets, ability of competitors to produce similar assets, and market licensing rates for similar assets. The royalty rate is applied to the expected revenues generated or associated with the asset. The hypothetical royalties are then discounted to their present value.

For example, our firm recently relied on this method to value a portfolio of trade names and trademarks of a health services health services Managed care The benefits covered under a health contract  provider that was acquired by a major publicly traded company publicly traded company

A company whose shares of common stock are held by the public and are available for purchase by investors. The shares of publicly traded firms are bought and sold on the organized exchanges or in the over-the-counter market.
 specializing in health care and wellness services. The most difficult and time-consuming component of this approach typically involves determining what to record as the appropriate royalty rate for the right to use the asset.

Royalty rates for trade names and trademarks vary widely among industries depending on the nature of the proprietary property, its role in the business, the specific industry and the marketplace. Relying on benchmarks from health services journals, royalty rate studies and discussions with licensing professionals, we observed rates for health-service trademarks ranged from 0% to 5%. We selected a rate on the low end of this range after considering a number of factors, including the trademarks' newness (brief track record), intense market competition, certain technology risks, profitability and limited name recognition. Guided by these factors we calculated future expected cash flows and, thus, the value of this portfolio (see "20 Steps for Pricing a Patent," JofA, Nov. 04, page 31, and "Damages Aren't Always Patently Obvious," JofA, Nov. 04, page 36).

Comparable (Guideline guideline Medtalk A series of recommendations by a body of experts in a particular discipline. See Cancer screening guidelines, Cardiac profile guidelines, Gatekeeper guidelines, Harvard guidelines, Transfusion guidelines. ) Transactions. A comparable transactions approach is typically employed to value marketing-related intangible assets. The value of an asset is based on actual prices paid for assets with functional or technical attributes similar to the subject asset. Using this data, relevant market multiples or ratios of the total purchase price paid are developed and applied to the subject asset. Since no two assets are perfectly comparable, premiums or discounts may be applied to the subject asset given its attributes, earnings power or other factors. Internet domain names An organization's unique name on the Internet. The chosen name combined with a top level domain (TLD), such as .com or .org, also called a "domain extension," makes up the Internet domain name. For example, is the domain name for the publisher of this Encyclopedia.  and newspaper mastheads sometimes are valued with a comparable transactions approach. The CPA/ABV or other valuation analyst can gather data from various industry sources and use them to create information relating to key sale characteristics. For example, in the valuation of Internet domain names, purchasers look for brand recognition, e-commerce value, recall value, frequency of name-related searches, letter count and pay-per-click popularity.

Avoided cost. The last approach we will mention is the avoided-cost approach. This method is popular as it is based on historical data, which is usually available and does not rely on the subjective assumptions employed under the other, previously mentioned methodologies. Under the avoided-cost method, the value of an asset is based on calculating the costs avoided by the acquiring company when obtaining a pre-existing, fully functional asset rather than incurring the costs to build or assemble the asset. The savings realized may include actual and opportunity costs Opportunity costs

The difference in the actual performance of a particular investment and some other desired investment adjusted for fixed costs and execution costs. It often refers to the most valuable alternative that is given up.
 associated with avoided productivity losses.

The avoided-cost approach can be a useful method to value technology. Using the economic principle of substitution, whereby an informed purchaser would pay no more for an asset than the cost of purchasing or producing a substitute asset with the same utility as a company's current technology, CPA/ABVs and other valuation analysts will collect estimates from company management on the number of employees and salaries associated with developing the technology, potential benefits associated with those employees/programmers, and ancillary expenses such as overhead, administrative, travel and meal costs associated with the technology.

In addition, the CPA/ABV needs to consider replacement costs, reproduction costs Noun 1. reproduction cost - cost of reproducing physical property minus various allowances (especially depreciation)
physical value

cost - the total spent for goods or services including money and time and labor
, depreciation and obsolescence when utilizing this approach. Lastly, it is necessary to calculate tax effects on expected cash flows, while accounting for any amortization tax benefit, to ascertain the final value of technology for the avoided-cost approach.

When valuing any single intangible asset, two final points are important. First, an intangible asset should be valued using multiple approaches, as applicable. As noted, the process of valuing intangible assets is prone to subjectivity and the use of several approaches will help to zero in on a credible value. For example, while the avoided-cost methodology may capture the historical development cost as well as the individual facts and circumstances surrounding the creation of an asset, it will not capture the future economic benefit of an asset that a discounted cash flow methodology would address.

Second, depending on the asset under review, it will be necessary to address and consider other components that may have a material effect on the final intangible asset value such as capital charges, functional and economic obsolescence, product sales cycles, synergistic opportunities and tax issues, to name a few. Valuation analysts often are very helpful in sorting through these complex matters.


While the standards statements that guide current practice took effect about five years ago, accounting and financial pronouncements are ever-changing. Through recent pronouncements such as Statement of Financial Accounting Standards no. 157, Fair Value Measurement, and the pending replacement of Statement no. 141 with the proposed Statement no. 141(R), FASB is making substantial revisions to required GAAP GAAP

See: Generally Accepted Accounting Principles


See generally accepted accounting principles (GAAP).
 to increase the use and impact of the fair value standard. As a result, the manner to identify and measure intangible assets is also changing.

Currently, intangibles are identified from a buyer's perspective. For example, in a business combination, an acquirer will only recognize the assets it seeks from the acquisition (that is, a buyer will not recognize a seller's trade name, even if that asset possesses value in the market, if it knows at the time of the acquisition that it will drop the name). The recent pronouncements, however, shift the perspective from that of a buyer to that of a market participant The term market participant is used in United States constitutional law to describe a U.S. State which is acting as a producer or supplier of a marketable good or service. When a state is acting in such a role, it may permissibly discriminate against non-residents. , which will require the buyer to recognize all assets that possess a value, whether or not the buyer will retain or utilize the intangible assets it acquires.

Consequently, this shift in perspective is having a significant impact on how items are reported, specifically in two principal areas. First, from the eyes of a market participant, a greater number of intangible assets may need to be identified. No longer will buyers be at liberty to exclude intangible assets that management teams view as valueless to their particular organizations. Correspondingly, goodwill on a buyer's balance sheet will decrease. Second, as a result of having more intangible assets recorded on their balance sheets, buyers will be forced to amortize amortize

To write off gradually and systematically a given amount of money within a specific number of time periods. For example, an accountant amortizes the cost of a long-term asset by deducting a portion of that cost against income in each period.
 those previously unidentified intangible assets according to their useful lives. Thus, under this new perspective, buyers may see more identified intangible assets on their balance sheets and less earnings on their income statements as a result of higher noncash charges Noncash charge

A cost, such as depreciation, depletion, and amortization, that does not involve any cash outflow. That is, this is treated as an accounting expense -- not a real expense that demands cash.

How interested parties view these changes will vary widely. For instance, auditors and regulatory agencies regulatory agency

Independent government commission charged by the legislature with setting and enforcing standards for specific industries in the private sector. The concept was invented by the U.S.
 may support the recent FASB pronouncements This article is a list of Financial Accounting Standards Board (FASB) pronouncements, including Statements, Concepts Statements, Interpretations, and Technical Bulletins, which are issued to provide rules and guidelines in preparing, presenting, and reporting financial statements  and general espousal of the revised fair value standard, which can be viewed as more conservative than current practice and are more likely to prevent an earnings overstatement o·ver·state  
tr.v. o·ver·stat·ed, o·ver·stat·ing, o·ver·states
To state in exaggerated terms. See Synonyms at exaggerate.

. A chief financial officer or other senior executive, on the other hand, likely would resist those changes, due to their potential negative effect on earnings. Technology or biotechnology firms might be less concerned with earnings and more concerned with the possibility of goodwill impairment Impairment

1. A reduction in a company's stated capital.

2. The total capital that is less than the par value of the company's capital stock.

1. This is usually reduced because of poorly estimated losses or gains.

, and therefore seek to identify as many intangible assets as possible. Market observers and financial analysts might be indifferent to these changes, as they will not have an expected impact on cash flows and not affect operations prior to EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) A metric used to show a company's profitability, but not its cash flow. EBITDA became popular in the 1980s to show the potential profitability of leveraged buyouts, but has become .

The identification and measurement of intangible assets are not simple tasks, and as the proposed statements take effect they will arguably ar·gu·a·ble  
1. Open to argument: an arguable question, still unresolved.

2. That can be argued plausibly; defensible in argument: three arguable points of law.
 make the process more complicated for management and their advisers. However, as the approaches and methods used to both identify and value intangible assets are more frequently practiced and refined, the process likely will become easier--less a matter of delineating between shades of Noun 1. shades of - something that reminds you of someone or something; "aren't there shades of 1948 here?"
reminder - an experience that causes you to remember something
 gray and more one of dotting the i's and crossing the t's.


See American Institute of Certified Public Accountants (AICPA).

Credential credential verb To determine or verify titles, qualifications, documents, completion of required training, and continuing education, in those persons who function in a professional or official capacity–eg, ER physician, neurosurgeon, etc. Cf Credentials.  

To find out more about the AICPA's Accredited accredited

recognition by an appropriate authority that the performance of a particular institution has satisfied a prestated set of criteria.

accredited herds
cattle herds which have achieved a low level of reactors to, e.g.
 in Business Valuation (ABV ABV Above
ABV Alcohol By Volume
ABV Abuja, Nigeria (airport code)
ABV Assault Breacher Vehicle
ABV Accredited Business Valuation specialist
ABV Auxiliary Building Ventilation
ABV Annual Buy Value
ABV Air Bleed Valve
) credential, visit, call the ABV Hotline at 201-938-3828 or download a copy of the ABV Handbook at


* AICPA ABV E-valuation Alert.

* CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000.  Consultant.

* CS E-News, Newsletter of the AICPA Consulting Services Noun 1. consulting service - service provided by a professional advisor (e.g., a lawyer or doctor or CPA etc.)
service - work done by one person or group that benefits another; "budget separately for goods and services"


* AICPA Code of Professional Conduct,

* Understanding Business Valuation: A Practical Guide to Valuing Small to Medium-Sized Businesses, by Gary R. Trugman (# 056600JA).

For more information or to make a purchase, go to www.cpa2biz biz  
n. Informal


Informal business

Noun 1.
.com or call the Institute at 888-777-7077.


* Fair Value for Financial Reporting: Meeting the New FASB Requirements, by Alfred King; New Jersey: John Wiley John Wiley may refer to:
  • John Wiley & Sons, publishing company
  • John C. Wiley, American ambassador
  • John D. Wiley, Chancellor of the University of Wisconsin-Madison
  • John M. Wiley (1846–1912), U.S.
, 2006.

* Financial Valuation: Applications and Models, by James R. Hitchner; New Jersey: John Wiley, 2003.

* Handbook of Business Valuation and Intellectual Property Analysis, by Robert Reilly and Robert Schweihs; New York New York, state, United States
New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of
: McGraw-Hill, 2004.

* Valuation and Economic Profit, by Jeffrey Cohen cohen
 or kohen

(Hebrew: “priest”) Jewish priest descended from Zadok (a descendant of Aaron), priest at the First Temple of Jerusalem. The biblical priesthood was hereditary and male.
; New Jersey: John Wiley, 2005.

* Valuation for Financial Reporting, by Michael Mard, et al.; New Jersey: John Wiley, 2002.

* Valuing Intangible Assets, by Robert Reilly and Robed Schweihs; New York: McGraw-Hill, 1998.

So Much for What?

Although 49% of participating senior executives said they relied on intongible assets to create shareholder wealth, only 5% systematically measured and trocked intongible asset performance.

Source: Accenture Ltd., survey of senior executives, 2003.

RELATED ARTICLE: Valuing intangible assets--fast-growing, demanding niche.

Valuing intangible assets is a tough professional services (job) professional services - A department of a supplier providing consultancy and programming manpower for the supplier's products.  arena, but skilled valuation analysts such as CPA/ABVs are up to the challenge. The success of an intangible assets valuation depends on a "meeting of the minds" that the client, its representative attorney and the appraiser A person selected or appointed by a competent authority or an interested party to evaluate the financial worth of property.

Appraisers are frequently appointed in probate and condemnation proceedings and are also used by banks and real estate concerns to determine the market
 clearly understand. To achieve this, the engagement framework should specify:

* The purpose of the engagement.

* The standard of value to be used (fair value for financial reporting purposes, fair market value or investment value, for example).

* Identification of assets/property to be valued.

* Date of valuation.

* Premise of value.

* Timing of the report.

* Details affecting the engagement's planning and acceptance.

Indeed, the beginning of the assignment or "the pre-beginning of the assignment, is the most important part of the valuation process," says Gary R. Trugman, CPA/ABV.

Credible valuations of intangible assets (including intellectual properties) are grounded in consistent application of approaches and methodologies accepted by the business valuation community at large. Three common approaches for appraising intangible assets are: income, market, and asset-replacement cost, for example. A CPA/ABV or other valuation analyst needs to know the strengths and weaknesses of each approach (and the related methodologies) specific to the property/asset being valued.

The accompanying text discusses four methodologies: discounted cash flows, relief-from-royalty, comparable transactions and avoided-cost. The first two methods are the income approach, and the other two are the market and asset-replacement approach, respectively. The income approach--commonly used to value intangible assets--calls for methods that include direct capitalization capitalization n. 1) the act of counting anticipated earnings and expenses as capital assets (property, equipment, fixtures) for accounting purposes. 2) the amount of anticipated net earnings which hypothetically can be used for conversion into capital assets. , profit split, excess earnings and loss of income. An asset-replacement cost approach also should consider the reproduction and replacement cost as well as the cost avoidance Cost avoidance is a management accounting term referring to an expense one has avoided incurring. It is commonly used in the field of energy management to describe the energy costs you avoided due to energy management initiatives.  method. Success is in the details.

--Robert P. Gray

Robert P. Gray, CPA/ABV, CFE CFE Conventional Forces in Europe (treaty)
CFE Cash Flow to Equity (finance/accounting)
CFE Comisión Federal de Electricidad (México)
CFE Certified Fraud Examiner
, FACFEI, of Parente Randolph, Dallas, has an extensive background in financial/accounting analyses, business valuation, economic damages, forensic investigation and litigation. He is a member of the AICPA's Forensic and Litigation Services Committee, which provides professional guidance to CPAs who perform fraud investigations and determine economic damages. His e-mail address See Internet address.

e-mail address - electronic mail address

Marc G. Olsen, M.S. economics, and Michael Halliwell, MBA MBA
Master of Business Administration

Noun 1. MBA - a master's degree in business
Master in Business, Master in Business Administration
, are director and managing director, respectively, of valuation services for the Taylor Consulting Group, Inc., Atlanta. They have extensive experience in valuing intangible assets for a variety of clients. Their e-mail addresses are molsen@ and mhalliwell@taylorconsultinggroup. com.
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Author:Halliwell, Michael
Publication:Journal of Accountancy
Date:May 1, 2007
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