Recognizing an intangible asset requires the item to be non-monetary, non-physical but valuable to the company’s profit. So, while the factories, equipment and software, all tangible assets, owned by Apple are beneficial, Apple would not be worth the many billions of dollars today if not for intangibles such as brand recognition, trademarks and business methodologies.
Intangible Asset Measurement
Although intangible assets cannot be seen or touched, there is no doubt that they are valuable to any company’s bottom line. Bill Gates, Microsoft giant, was quoted in a London Business School Journal, Business Strategy Review, saying: “Our primary assets, which are our software and our software-development skills, do not show up on the balance sheet at all…”
So how does a company employ techniques to calculate this priceless resource? It does seems that the accounting powers that be are cautious about adding intangible assets to balance sheets but an article on economist.com points to a new accounting theme that seems intent on discontinuing the disparity between stock market value and book value by solving this valuation problem.
Key value drivers need to be reported, recorded, managed and measured and since intangible assets often make up the bulk of a company’s market share, there is significant research being conducted on how to value this illusive, yet invaluable resource. According to CBIZ Valuation Group LLC, intangible assets can be valued in three ways:
- Cost of Creation: Which calculates the cost of asset duplication by another company, great for copyrights, trademarks and patents.
- Capitalization of income or savings method: Measures future benefits from newer intangible assets like commercial software, brand name and customer lists.
- Discounted cash flow: Used for assets with predictable lifespans such as subscriptions, contracts and royalties, measuring future benefits.
Intangible assets were at accountant discretion, but this is changing.