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Jan 2012

Three approaches to valuing intangible assets

Intangible assets are long lived assets used in the production of goods and services. They lack physical properties and represent legal rights or competitive advantages (a bundle of rights) developed or acquired by an owner. In order to have value, intangible assets should generate some measurable amount of economic benefit to the owner, such as incremental revenues or earnings, cost savings, and increased market share or visibility. Owners exploit intangibles either in their own business (direct use) or through a license fee or royalty (indirect use).

Valuation assignments must estimate the value of intangibles, recognising the volatility, ongoing creation, and problems with protection and enforcement. 

Three methods used to value intangible assets include the market, income and cost approaches. This tool provides CGMA designation holders with an overview of the three approaches.

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In financial reporting, intangible assets are valued on a control basis, and the total value of the intangible is estimated rather than the equity in the intangible.

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