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Unmasking the Value of Intangible Assets (Part 2 of 2)

Adrian Cheow Jul 2, 2024

The Valuation Process

  • ​In Part 1, we discussed the essence of intangibles and explored their diverse assessment methods.​
  • In Part 2, we will delve deeper into the factors influencing the determination of the valuation method and the key assumptions affecting its overall value.

Key Considerations When Selecting the Appropriate Valuation Method

  • Varied valuation methods can yield vastly different results, even when applied to identical intangible assets.​
  • To ensure valuation reflective of their actual worth, it is crucial to establish consistency and reliability in the valuation process.​
  • This can be achieved through the utilisation of flowcharts that encapsulate essential considerations.

A Quick Guide to Market Approach

Source: ​Intellectual Property Office of Singapore (IPOS) International – Uncovering Your Hidden Value​

 

A Quick Guide To Income Approach

Source: ​Intellectual Property Office of Singapore (IPOS) International – Uncovering Your Hidden Value​

 

A Quick Guide To Cost Approach

Source: ​Intellectual Property Office of Singapore (IPOS) International – Uncovering Your Hidden Value​

 

Key Inputs That May Affect The Final Valuation

Discount Rate

  • When determining the discount rate, valuers must carefully examine the risks associated with the intangible asset.​
  • For instance, customer relationships often involve less estimable cash flows, rendering them riskier compared to backlog which are more readily estimable.​
  • As a general guideline, higher risk corresponds to higher discount rates, consequently reducing the asset’s valuation.

Source: International Valuation Standards (IVS) 210 – Intangible Assets

Cashflow Projections

Projections may vary due to uncertainty stemming from risk factors, giving rise to a broader spectrum of values.

Valuers should consider the following risks in their assessment:​

  • Currency risks​
  • Market and industry risks​
  • Country-specific risks​
  • Asset-specific risks​

Currency Risks

  • Depreciation of the local currency may reduce the value of royalties received from international sales.

Market and Industry Risks

  • Technological advancements and changes in consumer preferences may render certain patents obsolete.

Country-Specific Risks

  • Political instability may lead to unpredictable changes in the legal and business environment, negatively impacting the performance of intangible assets located there.

Asset-Specific Risks

  • Generally, more abstract intangibles such as goodwill in contrast to service contracts carry greater asset-specific risks.​

Source: Accounting and Corporate Regulatory Authority (ACRA) – Valuing Intangible Assets in a Tangible World

Economic Life

  • An intangible asset’s fair value typically increases with its economic life due to the prolonged ability to generate cash flows.​
  • This duration can be limited or extended by legal, regulatory and contractual factors.​
  • For instance, patents in Singapore confer exclusive rights to a technology only for a limited period of 20 years. Subsequently, the expiration of this protection may diminish income streams.

Source: International Valuation Standards (IVS) 210 – Intangible Assets

Tax Amortisation Benefit (TAB):

  • In several tax jurisdictions, intangible assets may undergo amortisation for tax purposes (“TAB”). ​
  • This enables businesses to spread the cost of their intangible asset over a period. TAB increases initial after-tax cash flows, leading to elevated overall valuation.​
  • When employing the market or cost approach, the price paid to acquire or recreate the asset would have already incorporated income tax effects, rendering further adjustments unnecessary.​
  • However, this aspect is not inherently factored in the income approach. Therefore, explicit inclusion of TAB will be required.

Source: International Valuation Standards (IVS) 210 – Intangible Assets

 

The Bottom Line

  • The valuation of intangible assets can only be as thorough and accurate as the information that goes into it.

 

At Baker Tilly, we recognise the importance of precision at every stage. ​

Don't let the true worth of your business remain a mystery — connect with us today to unveil your potential, one valuation at a time!

Unmasking the Value of Intangible Assets (Part 2 of 2)

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Adrian Cheow
Executive Director & Practice Leader | CFA, FCCA

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