How to Value: Accounting

When it comes to intangible assets, the main focus for an accountant is on the distinction between internally generated IP and acquired IP and how to value both. Much of the intangible assets that accountants deal with are internally generated intangibles which inlcude research & development, goodwill, and client portfolios. The problem, however, is that much of a company's intangibles are not capitalized and is therefore difficult to value. For this reason, accountants dealing in any significant capacity with intangibles will usually seek the guidance of the accounting firm's in-house valuator or an outside valuator, especially in the event that the intangibles need to be valued for a merger or acquisition. In certain situations, the intangible asset value may be reflected on the financial statements in the goodwill item line, however, the allocation of the intangibles are not presented in the financial statements, so further investigation would be needed to properly value the company's intangibles holdings.

In most instances, the valuator will complete a three step process to accurately value a company's IP holdings. These three steps are:

Determine the economic useful life of the intangible - the valuation needs to take into account that the economic returns of most intangible assets will decline over time if they do not receive continued investments in maintenance, enhancements, and new development and calculate the value accordingly.
Calculate projected cash flows - determining the appropriate recurring revenues associated with the assets, their appropriate operating margin, and the operating profit after taxes will aid in calculating an appropriate value for the intangible assets.
Determine an appropriate discount factor - an appropriate discount factor has to be applied against the cash flows in order to calculate a fair market value. The discount rate used in a discounted cash flow calculation should reflect the risks of achieving the projected results of operations.

Further information that is important for accountants or in-house valuators seeking to value a company's intangibles assets are the different valuation standards. Two of the most used valuation standards are:

Market Value (as defined by the International Valuation Standards Council): "Market value is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeable, prudently, and without compulsion."
Fair Value (as defined by the International Accounting Standards Board): "Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction."