Intangible assets (also known as soft assets) are those which cannot be touched or seen. They are not physical in nature. Goodwill, patents, strong customer relationships, organizational processes, skilled workforce, trademarks, copyrights, business methodologies, organizational designs and brand name are some examples of intangible assets. These assets promote corporate growth and enhance shareholder value.
Firms do not disclose information regarding their intangible assets as they are not obligated to do so. It is a major challenge for investors to value the intangible assets of a firm. Investors usually undervalue the intangible assets of good organizations in established sectors. The value of intangible assets of a firm cannot be determined by going through the conventional financial statements.
Various methodologies are used to value intangible assets. All of them fall under one of the three fundamental valuation approaches. They are: market capitalization approach, the income capitalization approach and the cost approach. Prospective financial information, royalty rates, capitalization multiples, premium profits, discount rates, contributory asset charges, comparable transaction prices and implied valuation multiples are some inputs that are frequently used while valuating intangible assets.
Most of the time it is either impractical or impossible to value an intangible asset on a stand alone basis. It is advisable to value the asset in conjunction with other tangible or intangible assets. Relief from royalty method (also known as royalty savings method) has been used for many years in the valuation of intellectual property.
Advertising awareness, brand awareness, brand associations and brand loyalty help in determining the value of a brand. It is advisable to keep track of investments made by the firm in R&D. It is possible to relate the R&D expenditure (of the firm) on a new product to the subsequent share of revenues emanating from that product.
The number of patents and trademarks registered in a firm’s name is a very good indicator of its ability to innovate. Valuating the human capital of a firm is a huge task. The HR policies of the firm may be helpful in this endeavor. It is a good idea to keep track of the firm’s investments (nature of these investments) in technology. These investments are more likely to have a huge impact on the performance of the firm.
It is impossible to arrive at precise valuations of intangible assets. However the above mentioned information helps investors make wise investment decisions.