Valuation
For accounting purposes, intangible assets are defined as non-monetary assets without physical substance that a company uses to produce or sell goods and services, lease to other companies, or for administrative purposes.
To qualify as intangible assets, the items must also
- are identifiable
- are controlled by the enterprise and represent future economic benefits expected to flow to the enterprise
Methods
Valuing an intangible asset is complex, and there is no single correct approach. The three most common methods are market-based, income-based and cost-based valuation. Each method has several variations, some simple and others more complex. All the methods rely heavily on professional judgement.
Market-based valuation
The value is calculated based on the prices achieved for similar assets. What is the market willing to pay? Although IPR is increasingly being traded, there are often few comparable transactions.
In addition, in most cases there are significant differences between two intangible assets, making them difficult to compare.
Income-based valuation
These valuation methods are based on the earnings the company can generate in the future. One widely used approach involves discounting future cash flows.
If you are valuing a company or product that is still under development or being introduced to the market, historical figures and the balance sheet have limited relevance. Its value will depend on the market potential of the company or product, how well protected your competitive advantages are, and the margins you can achieve.
Remember that this method also depends heavily on you carefully considering the assumptions you use in the calculation.
Cost-based calculation
This method is based on replacement cost – in other words, how much it would cost to replace the asset with a new, equivalent one. The drawback is that there is rarely a correlation between an asset's value and its development cost.
The model is most commonly used for accounting purposes in research and development projects, and where it is not possible to 'isolate' future cash flows, for example if a software application has been developed for internal use.
Document the method
All valuations rely heavily on judgement. The context in which you carry out the valuation also plays a major role. For example, macroeconomic conditions, interest rates and inflation can affect the outcome. This means that a valuation is only a snapshot: it is valid here and now, but not necessarily tomorrow.
It is therefore important to document the method you use to calculate the value for investors, tax authorities and auditors. It can often be useful to create different scenarios so you can easily see how the price changes under different assumptions.
When should you carry out valuations?
Valuations of intangible assets quickly become outdated. Here are some common situations where you need to carry out a valuation:
- raising capital (loans and equity investment)
- capital increase through a contribution in kind of an intangible asset
- accounting for research and development projects
- a desire to measure the value creation and cost-benefit of an intangible asset
- accounting treatment under IFRS in connection with capitalisation on the balance sheet
- tax
- technology licensing
- purchase or sale of intangible assets
- in disputes, for example if someone copies you or accuses you of copying others
- inventions created in the course of employment
Cross-check the result
It may be useful to use two different methods to cross-check the result. If the two methods produce significant differences in price, you should carefully review the underlying data you have used.
Other factors also help determine the value of your intangible assets:
- How well protected is the technology?
- How strong is the patent and design protection?
- Has a trademark been registered or a brand been built?
- How easy is it to copy knowledge?
- How well has the technology been commercially tested?
- What is the market potential for the technology? (revenue)
- What margins are typical in the industry, and what margins can you achieve?
- What is the technology's market value?
- For licensing:
- Who will maintain and enforce the rights?
- What investments must the licensee make?
Accounting treatment
There is a standard for the accounting treatment of intangible assets created through your own research and development or acquired for long-term ownership or use.
Accounting for intangible assets is based on the general valuation rules for fixed assets set out in section 5-3 of the Norwegian Accounting Act. The Act also includes a valuation rule for in-house research and development in section 5-6.