by using socalled income modelvaluation models

It seems yet here necessary to make some clarifications with regard to the valuation of intangible assets in the balance sheets of firms and combat two ideas.

First received idea: in the new book repository, all assets of a company should be valued permanently in fair value.

The reality is different. Today many companies assets are not counted in fair value. The case of intangible assets is here a direct illustration. Under the application of standards IFRS 3 (business combinations) and IAS 38 (intangible assets), companies can really recognize on their balance sheet the intangible assets at the time of acquisition. Yet it is that of the assets of the acquired entity and not those of the acquiring entity. In other words, if company A acquires company B, should recognize in the consolidated accounts of (b) intangible assets estimated at fair value at the date of the takeover. On the other hand, A not post in any way its own active, nor in the takeover, or even after.

Second wisdom: in fair value accounting would impose systematic recourse to the concept of "mark to market", i.e. in a reference to market prices, including the intangible capital of a company. Here again, this is a wrong idea. Indeed, with respect to intangible assets, the concept of "mark to market" is not operating because there is rarely directly observable market for intangible assets price.

How should we then determine the fair value of these assets The more often based on the concept of "mark to" model, i.e. by using so-called "income" model"valuation models. They are based on an update of stream of future income from the assets in question. It's sort of the application of updated risk-taking methods applied to intangible assets.

Quality and care

These models are particularly used to evaluate brands, technologies, order books, customer contracts, relations clients, licenses or some software. All model refresh, it should be noted that should determine both future income flows and the discount rate.

With regard to the determination of future revenue streams, there are three main approaches.

The first, so-called "relief from royalty", is to estimate the theoretical charge that the company would be willing to concede to use the assets if it did not own.

The second so-called "excess earnings", approach to estimate the "indulging" future assets is able to identify. Surplus "results", means the difference between the operational result net of the one hand, the compensation of all the assets necessary for the operation of the assets.

The third approach, the "incremental risk-taking" ("incremental cash flow"), consists of estimating the differentials of risk-taking that the intangible asset can be, because it reduces operational costs, either because it increases revenue. Premium prices ("price premium") approaches implemented to evaluate certain marks place for example in this category.

In all cases, since discount models are based on forecast data, great care must be brought to the quality and the prudence of the forecasts.

Revenue streams must reflect both the sustainability of the assets, its specific profile (for example, the awareness for a brand), its contribution margin company but also to the profitability of the company itself.

With regard to the discount rate used for the assessment of an intangible asset, simply here recall that the latter is generally above the WACC, or capital weighted average cost of the company. "Intangible" assets is generally considered as more risky than an activity as a whole, which translates into an additional premium in the rates used to refresh the forecast revenue streams.

A qualitative analysis

Finally note that for some intangible, when a market price can be observed, or a model updating of flows of income set implementation, it is always possible to use an estimate of the value of an intangible asset based on the "mark to cost", i.e. on estimates of the costs for replacement or reproduction of the (case of databases) assets(, or some software client files).

In sum, the methods used today to determine the value of an intangible asset are widely known and disseminated. They are based essentially on future elements, or on estimates of costs, more rarely on market prices. Therefore, as in any exercise of valuation, it is essential to conduct a qualitative analysis of the assets (including legal, technical aspects and marketing). Note that these fundamental principles are also retained in the draft international standard ISO on the assessment of the marks.