Traditionally, accountants have shown the value of a company’s assets predominantly as tangible assets based on their historical cost with scant regard for the true value of intangibles. However, in today’s increasingly knowledge-based economy, it is often the company’s intellectual property that drives business and accounts for a large proportion of a company’s value.

Over the last twenty years sophisticated valuation techniques have been developed and brand and intangible asset valuation is now recognised by legal and finance practitioners. Since 2002, under the accounting standard FASB 141, all US companies have been required to report the values of all their acquired intangible assets on their balance sheets. Despite this, research that we carried out into how the S&P 100 accounted for their acquisitions between 2002 and 2006, shows that many leading companies are failing to comply with FASB 141 and are yet to fully recognise and/or explain the value of their intangible assets.

Although the application of intangible assets can be a complicated process, the theory is no different to the valuation of tangible assets, such as a house. For example, a real estate agent will begin by comparing the cost of the house to other properties on the market to give an estimate of its value. A brand valuation process will use this Market valuation method to compare intangibles using market transaction data.

The brand valuation process will then examine how much it would cost to recreate an existing intangible asset based on the original cost of creating it and the potential cost to recreate. This Cost valuation method is less realistic than the other methodologies since the value of the asset is likely to be different from the costs incurred when creating it. Likewise, the value of a house is likely to be far higher than the cost of the materials and labour used to build it.

 
The intangible asset can generate an income for the business in the same way that a house can generate a rental income for the owners. The Income valuation method looks at the projected future earnings that are attributable to the asset over its useful life and discounted to its net present value. This allows businesses to see how much of their income is generated by a brand and other intangible assets.

Intangible assets are generally valued through a combination of these methods, depending on the individual asset or purpose of the valuation: The income valuation method is considered to be the most realistic approach and produces the most informed results. The other methods are useful for supporting and qualifying the results.

Intangible assets are crucial to business value and growth and it is important that they are identified alongside the tangible assets and valued as individual components. The valuation methods outlined in this article are proof that intangible asset valuation should not be ignored or regarded with suspicion, rather business information should be critical.