Intangible Asset Accounting - Definition

There are several regional and international accounting standards for the accounting of Intangible Assets; including IFRS3, IAS 36 and IAS 38. To understand the standards please read through our brand related accounting standards.

Brand Finance specialises in the valuation of Intangible Assets, we have listed below a number of recognised Intangible Asset valuation methods. For these purposes we will refer to brand valuation for the remainder of this section. However, the techniques described may equally be applied to the valuation of many other forms of intangible asset.

Cost based Brand Valuation

'Creation costs' may be estimated by looking back to brand launch and restating actual expenditure in current cost terms. This approach may provide a meaningful number for a new brand, where the time period is short and the costs are readily available. However, even when costs can be collected consistently the answer does not represent the current value of the brand.

'Re-creation costs' may be also estimated. The obvious difficulty is that there is no such thing as an identical brand so it may be hard to calculate a relevant re-creation number. Brands are valuable because they are unique. By their very nature they are not comparable or replicable.

For these reasons cost based valuations are usually only commissioned as a sense check.

Market based Brand Valuation

This assumes that there are comparable market transactions (specific brand sales), comparable company transactions (the sale of specific branded companies) or stock market quotations (providing valuation ratios against which a comparable branded entity can be valued). A valuation may be based on the disposal of comparable individual brands, specific branded divisions or whole companies where adequate information is made publicly available.

In practice, there are few directly comparable transactions. Even where there are sales of specific brands or branded businesses, details are generally not widely available, and it is hard to make comparisons.

In addition, the notion of comparability assumes that brands are identical, which is never the case. Market based valuations also tend to be used only as a sense check.

Income based Brand Valuation

There are two alternative approaches:

1. Royalty Relief (Relief from Royalty), is the method Brand Finance favours - more information can be found on the Royalty Relief section.

2. Economic Use

This considers the economic value of a brand in current use to current owner. In other words, it considers the return that the owner actually achieves by owning the brand - now and in the future.

Economic use valuations assume that brands provide their owners with security of demand. In the short run a manufacturer without a brand might enjoy the same sales, the same economies of scale, even the same premium prices as the manufacturer with a brand. However, the non-branded manufacturer could not rely on the same security of knowing that the brand's customers this year are likely to be customers of the brand next year, and for many years after that.

This approach also depends on the accuracy of future sales and earnings projections. It uses the future earnings attributable to a brand after making a fair charge for the tangible assets employed. A charge is also made for tax at a notional rate. The resulting brand earnings are discounted back to a Net Present Value (NPV) representing the current value of the brand.

Typically such brand valuations are based on 3-5 year earnings forecasts. In addition, an annuity is calculated on the final year's earnings on the assumption that the brand continues beyond the forecast period, effectively into perpetuity. As brand rights can be owned in perpetuity and many brands have been around for over 50 years, this is not an unreasonable assumption.

Steps in an Economic Use valuation:

  • Modeling the market (to identify market demand and the position of individual brands in the context of all other market competitors. Usually the valuation model is segmented to reflect the relevant competitive framework within which the brand operates).
  • Forecasting economic value added of the branded business (to identify total branded business earnings).
  • Estimating Brand Value Added BVA® using business drivers research (to determine what proportion of total branded business earnings may be attributed specifically to the brand).

Benchmarking brand risk rates - Brandßeta® analysis (to assess the security of the brand franchise with both trade customers and end-consumers and therefore the security of future brand earnings). The resulting discount rate is used in the Discounted Cash Flow DCF calculation.

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