Management accounting--financial strategy: many students find intangible assets hard to handle, William Parrott explains three methods of calculating the total value of a firm's intangibles.
| Author | Parrott, William |
| Position | Study notes |
Basic valuation techniques are examined in almost every P9 paper and candidates generally fare poorly on such questions. In particular, they often fail to make any attempt to value intangible assets. Some even seem to believe that, if there are no intangibles shown in a financial statement, there are none to value. In some respects this is not surprising, because the previous time they were asked to consider intangibles was when they took P7 (Financial Accounting and Tax Principles), which would have been quite a while ago for some. As a result, they often find it hard to imagine the wide variety of intangibles that may exist. This, of course, makes valuing them all the more difficult.
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Intangibles are assets that do not have a real physical presence. Brands, patents, goodwill, the knowledge of a firm's workforce and even its corporate strategy are all assets that aren't tangible but still add value. It's virtually impossible to create an exhaustive list of potential intangible assets, but it should be noted that some--eg, a firm's patents and trademarks--are more "tangible" than others--eg, its strategy and knowledge base. Indeed, where an intangible asset has a recognisable description, is capable of being owned, is transferable, is subject to legal existence and protection--and where there is tangible evidence of its existence--it can be valued separately from the business as a whole. The valuation of these separately identifiable intangibles is outside the scope of this article, but it is useful to be aware that certain components of a company's total intangibles are easier than others to value.
Ethical issues can also arise. For example, it's generally accepted that the skills, knowledge and capabilities of employees have a value to their company. But the calculation of this value would seem to suggest that the company owns its staff, which may be distasteful to some people.
The measurement of the total value of intangibles has always been problematic. The task is made harder by the fact that values can change rapidly. For instance, the image and hence value of a brand can be seriously harmed by a product scandal of one sort or another. Equally, the value attributable to a firm's workforce could be reduced significantly by the loss of key people.
But the fact that it's hard doesn't mean that it shouldn't be attempted. The three following methods can be used to calculate the total value of a firm's intangible...
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