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Valuation of objects in intangible form

Valuation of objects in intangible form

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Valuation of objects in intangible form valuation examination of objects that do not exist in material form, but allow to obtain certain economic benefits. Objects in intangible form include:

  • intangible assets;
  • financial interests (shares, stocks);
  • options;
  • securities and their derivatives;
  • promissory notes;
  • receivables and payables;
  • other property rights.


Intangible assets as objects of valuation

Intangible assets are divided into identifiable and non-identifiable. An intangible asset is identifiable if it:

  1. may be separated from the entity and sold, transferred, licensed, leased or exchanged, separately or in conjunction with the relevant contract, with an identifiable asset or liability, regardless of the entity’s intentions regarding that intangible asset;
  2. arises from contractual or other legal rights, whether those rights may be transferred or separated from the business or from other rights and obligations.


The main classes of intangible assets that can be identified are assets:

1. Related to marketing, ie those used mainly in the field of marketing and promotion of products or services, in particular:

  • rights to commercial designations (rights to trademarks (marks for goods and services), commercial (brand) names, etc.;
  • domain name on the Internet;
  • agreements to avoid competition;
  • others.

2. Related to the customer or supplier, ie those arising from the relationship or knowledge of customers or suppliers, in particular:

  • contracts for the provision of services, maintenance or supply;
  • licensing and royalty agreements;
  • employment contracts;
  • franchising agreements;
  • order-related documentation, customer relationships, customer databases;
  • rights to use natural resources (right to use subsoil, other resources of the natural environment, geological and other information about the natural environment, etc.);
  • other intangible assets (the right to conduct business, use economic and other privileges, etc.).

3. Technology-related, ie those arising from contractual or non-contractual rights to use patented and non-patented technologies, databases, formulas, designs, software, processes and know-how, in particular:

  • rights to inventions, utility models, industrial designs, plant varieties, animal breeds, layout (topography) of integrated circuits, trade secrets, including know-how, protection against unfair competition, etcetera;
  • computer programs, programs for electronic computers, data compilation (databases), etc.), except for those for the acquisition of which are recognized as royalties;
  • others.

4. Related to art, ie those arising from rights to benefits, such as royalties from works of art, such as plays, books, films and musical works, and from non-contractual copyrights.

Rights to intangible assets related to art may be protected by law (copyright laws) and may be granted on a contractual basis.

In each class, assets can be contractual or non-contractual.


What is goodwill?

Where rights are granted under a contract or agreement, the terms of the agreement are relevant to the determination of the rights being assessed. Some transactions may have a limited duration or contain restrictions on the transfer, which may significantly affect the value of the intangible asset. Any intangible asset that is not identifiable, related to a business or group of assets can generally be classified as goodwill.

Goodwill is an intangible asset that cannot be identified because it cannot be separated from the business to which it belongs. Although goodwill cannot be separated and therefore it is not possible to fully identify some of the elements that make up goodwill, the following can be identified, in particular: synergies inherent in a particular company resulting from a combination of two or more activities, such as reductions operating costs, economies of scale or growth of the product range; opportunities to expand business in other markets; the benefits of the combined labor force as opposed to any intellectual property developed by individual members of that combined labor force; benefits that can be obtained from future customers; benefit from the formed network; others. In general, goodwill is the amount remaining after deducting from the cost of the business the market value of all identifiable tangible, intangible and monetary assets, including actual or contingent liabilities.



What is option?

In finance, an option is a contract which conveys its owner, the holder, the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price prior to or on a specified date, depending on the form of the option. Options are typically acquired by purchase, as a form of compensation, or as part of a complex financial transaction. Thus, they are also a form of asset and have a valuation that may depend on a complex relationship between underlying asset value, time until expiration, market volatility, and other factors. Options may be traded between private parties in over-the-counter (OTC) transactions, or they may be exchange-traded in live, orderly markets in the form of standardized contracts.


Approaches and methods of assessment

The main approaches described in NSO №1 «General principles of valuation of property and property rights» can be applied to the valuation of intangible assets, but due to the heterogeneous nature of intangible assets, the number of methods that can be used to value them is much greater. Western Ukrainian Expert Advisory Center can use such approaches as valuation of intangible assets, such as the Market approach, the income approach, the method of exemption from royalties, the method of additional income, the method of excess income, the benefit of tax amortization, the cost approach, and so on.


Assessment of losses from misuse of an intangible asset

The amount of losses for misuse of an intangible asset is determined as of the valuation date using the valuation procedure for the accumulation of profit (income) not received by the entity that owns the intangible asset and / or the licensee due to misuse of the intangible asset, usually based on volumes of production and / or sales of counterfeit products. The amount of losses may also include the loss of goodwill from the loss of reputation in the past and the expected loss from it in the future due to the sale of counterfeit products, as well as the cost of restoring reputation.



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