Valuation of intangible assets. What is this and what is it for
“Intangible property”, “intangible asset” – these are phrases that are not clear to a man in the street. In everyday life, we are used to the fact that what we can touch has a certain value. However, when it comes to intellectual property and the fact that it also has its value, the question involuntarily arises, what is the value of this property and how to determine it.At the very beginning, it should be noted that an intangible asset and intellectual property are synonyms, but they are used in different areas of human activity.To facilitate the understanding of what intangible assets valuation involves, an understanding of what applies to these assets is necessary. An intangible asset is an asset that simultaneously meets the following requirements (paragraphs 2 - 4 of the Accounting Regulation 14/2007; paragraph 3 of Article 258 of the Tax Code of the Russian Federation):- an asset is not a thing;- the asset is able to bring economic benefits to the organization, i.e. is designed for use in the manufacture of products, when performing work or providing services, for the administrative needs of the organization for a long time, i.e. a useful life of more than 12 months or the normal operating cycle if it exceeds 12 months;- the organization does not intend to sell the asset within 12 months or the normal operating cycle if it exceeds 12 months;- the organization has rights to this asset (patents, certificates, other protection documents, an agreement on the alienation of the exclusive right to the result of intellectual activity or an individualization tool, documents confirming the transfer of the exclusive right without a contract, etc.), on the basis of which the organization can restrict the access of others to the use of an asset;- the actual (initial) value of the asset can be reliably determined.Intangible assets include: works of science, literature and art; programs for electronic computers and databases; inventions; utility models, industrial designs; breeding achievements; production secrets (know-how); trademarks and service marks; goodwill arising in connection with the acquisition of an enterprise as a property complex (in whole or in part).There is also a list of what cannot be attributed to intangible assets, in particular:- R&D not yielding a positive result, not completed or not formalized in the established manner;- things in which the results of intellectual activity and equivalent means of individualization are expressed (for example, CDs with programs recorded on them);- financial investments;- expenses associated with the formation of a legal entity (organizational expenses);- intellectual and business qualities of the organization’s personnel, their qualifications and ability to work.Now having an idea of what an intangible asset is, we will analyze the principles of how its value is estimated. At the same time, it is initially necessary to note that the main difficulty in this aspect is that it is impossible, due to the intricacies of intellectual property rights, to find two identical solutions. Solutions may be similar but not the same!For a practical assessment of the value of intangible assets, experts recommend costly, profitable and combined approaches commonly used in valuing other types of assets.
Income approachThe main methods of income approach for assessing intangible assets are:cash flow discounting method for intangible assets,direct capitalization method of intangible assets,royalty exemption method for intangible assets,excess profit method of intangible assets,method of splitting profits of intangible assets.The use of the income approach in assessing intangible assets is subject to the possibility of obtaining income from the use of intellectual property. Income from the use of intellectual property is the difference for a certain period of time between cash receipts and cash payments (hereinafter - cash flow) received by the copyright holder for the granted right to use intellectual property.The main forms of cash receipts are payments for the granted right to use intellectual property, for example, royalties, lump-sum payments and others. The amount of payments for the granted right to use intellectual property is calculated on the basis of the most probable value that can develop when the parties to the transaction act reasonably, having all the necessary information, and any extraordinary circumstances are not reflected in the amount of payments.The main forms of benefits from the use of intellectual property are:- saving costs for the production and sale of products (works, services) and / or investments in fixed assets and working capital, including the actual reduction in costs, the absence of costs for obtaining the right to use intellectual property (for example, the absence of license fees, no need to separate the most probable share of the licensor from the profit);- increase in the unit price of products (works, services);- an increase in the physical volume of sales of manufactured products (works, services);- reduction of tax payments and (or) other obligatory payments;- reduction of payments for debt servicing;- reducing the risk of receiving cash flow from the use of the valuation object;- improving the time structure of cash flow from the use of the valuation object;- various combinations of these forms.The benefits of using an intangible asset are determined on the basis of a direct comparison of the amount, risk and time of receipt of cash flow from the use of intellectual property with the amount, risk and time of receipt of cash flow that a copyright holder would receive if the intellectual property was not used.The market value of intellectual property is determined using the income approach by discounting or capitalizing cash flows from the use of intellectual property.Cost approachThe cost approach is used for inventory, balance sheet accounting, determination of the minimum price of intellectual property below which a transaction becomes unprofitable for the owner of an intangible asset.In the framework of the cost approach, the following methods are used in assessing the value of intangible assets:method of summing actual costs;current cost method;replacement cost method;reduced cost method.
The combined approach is to combine income and cost approaches, which allows you to best determine the value of an intangible asset for all market participants.Having received an idea of how intangible assets are valued, it is necessary to understand for what purposes this is done. We can distinguish a certain list of situations in which an assessment of intangible assets is carried out:• inventory and introduction of intellectual property into economic circulation;• amendments to the financial statements (revaluation of intangible assets) and / or refinement of the tax base;• entering of intellectual property on the balance sheet of the organization;• inclusion of intellectual property in the authorized capital;• purchase and sale or assignment of rights to intellectual property;• inheritance, gift or gratuitous transfer of rights to intellectual property;• the need to manage intellectual property as a value creation strategy;• the forthcoming conclusion of a license agreement on the right to use intellectual property and the need to justify the calculation of payments for their use;• privatization, liquidation, restructuring or bankruptcy of the enterprise;• valuation of intellectual property with the aim of pawning;• use of intellectual property as part of franchising;• legal proceedings in the division of property between owners of the enterprise, as well as in cases of confiscation;• takeover of one enterprise by another or their merger;• evaluation of investment projects in which it is planned to use intellectual property;• assessment of damage resulting from violation of rights to intellectual property, as well as from the production of counterfeit products;• insurance of intellectual property;• valuation of intangible assets, as one of the stages of business valuation;• determination of the share of economic effect attributable to intellectual property when used in own production;• calculation of remuneration of authors of intellectual property;• leasing of rights to intellectual property.The valuation of intangible assets requires a careful study of the available data in order to determine the profit flow associated with the assets being valued, to identify the residual life of the assets and the applicable valuation techniques to accurately reflect the value of the assets.To conduct an assessment of intangible assets, it is necessary to collect a certain list of documents by which the assessment will be carried out.The list of documents for the assessment of intellectual property, intangible assets:1. The name of the object of intellectual property, its purpose.2. Description of the intellectual property.3. A document confirming the rights, transfer of rights (patent, letter of protection, etc.).4. License agreement for use (indicating the distribution of income between the licensor and the licensee) - if necessary.5. Plans for the production of the main types of products using the object of intellectual property (type of product, its selling price, cost, how much time will be produced, output by type and year for the next 5 years).6. The planned gross income for the period of use of the intellectual property, and the planned amount of expenses (paid taxes on profits, property, etc.).7. Information about analogues of products planned for release using the intellectual property, and their value by type.8. The contract for the work on the basis of which the intellectual property was created (if any).9. Information on R&D costs.10. Information on the costs of formalization and filing an application, patent research, obtaining and maintaining a patent.11. Information on the amount of fees and royalties.12. Information on the costs of production preparation and implementation.13. Information on the costs of marketing research, advertising.14. The actual period of use of the intellectual property on the date of valuation, useful life.15. Depreciation rate.16. The residual carrying amount.Although some of the aforementioned methods for evaluating intangible assets are widely used by the financial community, it is important to note that evaluating intangible assets is more an art than a science, and is a multidisciplinary study covering areas such as law, economics, finance, accounting and investment. When performing the assessment, it is necessary to take into account a large number of subtleties and nuances. Also, a significant factor in the evaluation of intangible assets is the qualification of the appraiser, his experience and breadth of knowledge in different areas of economic activity.