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Introduction to Intangible Assets
Accounting Textbooks Boundless Accounting Controlling and Reporting of Intangible Assets Introduction to Intangible Assets
Accounting Textbooks Boundless Accounting Controlling and Reporting of Intangible Assets
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Accounting
Concept Version 6
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Valuation of Intangible Assets

The valuation of intangible assets are primarily derived from transactions involving intangible assets.

Learning Objective

  • Summarize how to calculate the value of an intangible asset


Key Points

    • Intangible assets include items such as patents, copyrights, software, trade secrets, and goodwill. However, not all intangible assets are recognized on the financial statements of a company.
    • The costs to acquire and defend intangible assets are used by accountants to establish intangible asset values.
    • Valuation is an estimate that is subject to change based on market conditions and advances in technology.

Terms

  • valuation

    An estimation of something's worth.

  • Trademark

    A word, symbol, or phrase used to identify a particular company's product and to differentiate it from other companies' products.


Full Text

Valuation of Intangible Assets

Valuation models can be used to value intangible assets such as patents, copyrights, software, trade secrets, and customer relationships. Since few sales of intangible assets are observable, benchmarking the value of intangible assets can be difficult. As a result, present value models or estimating of the cost to recreate an intangible asset are often used to is these valuations.

Although they have no physical characteristics, intangible assets have value because of the advantages or exclusive privileges they provide to a business. Intangible assets generally arise from two sources: (1) exclusive privileges granted by governmental authority or by legal contract, such as patents, copyrights, franchises, trademarks and trade names; and (2) superior entrepreneurial capacity or management know-how and customer loyalty , which is called goodwill.

Goodwill is an intangible asset

Strong customer relationships often generate goodwill. This is a long line of customers queued up at an Apple store.

Intangible assets are initially recorded on financial statements at their purchase price, or the cost of acquiring the asset. If an intangible asset is internally generated, its cost is immediately expensed.

The valuation of intangible assets with identifiable useful lives such as patents, trademarks, and copyrights are initially valued at acquisition costs. The value of these assets can be increased or decreased, based on the outcomes of court proceedings. If a company incurs legal costs to successfully defend an intangible asset, those costs are capitalized and increase the value of the intangible. On the other hand, if a company is unsuccessful in defending an intangible asset, the intangible is worthless and the company is required to write it off.

U.S. GAAP has very specific rules regarding the recognition of intangible assets on financial statements. With that said, a company can still have very valuable intangible assets that are not recognized on its financial statements. From an accounting perspective, intangible asset valuation is primarily derived from acquisition costs. An acquisition identifies the value one party was willing to pay for an asset while at the same time identifying the value another party was willing to accept to relinquish that asset.

Goodwill is an excellent example of how intangible assets are valued. Let's say Company A has net assets equal to 150,000 and is acquired by Company B for 200,000. Why would Company B pay a 50,000 premium? Goodwill! Company B believes that Company A has value in excess of their net identifiable assets, and was willing to pay an additional 50,000 to acquire it. The 50,000 value of Company A's goodwill was derived from a transaction.

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