How to do intangible asset valuation in Singapore?
This article will discuss the concept of intangible asset valuation in Singapore and its application.
Basically, intangible assets are non-physical assets that cannot be touched, such as intellectual property, goodwill, trademarks, patents and copyright. For a company, intangible assets are very important as they create, build and maintain their competitive advantage. It is quite understandable that companies need to determine the value of their intangible assets because their value will measure the economic benefit. However, the valuation of companies’ intangible assets is one of the most difficult tasks due to the fact that they are not bought and sold in the marketplace. But, how do companies value intangible assets? This article will discuss the concept of intangible asset valuation in Singapore and its application.
Intangible assets valuation
In general, valuation refers to the process of determining the value or worth of an asset or any other good. In the context of intangible assets, it is a process that intends to establish the worth or value of an intangible asset. Intangible assets are not physical assets, thus intangible assets are valued based on various factors and using appropriate methods. As a result, intangible asset valuation provides a framework to review, analyze, and assign value to intangible assets.
What are intangible assets in a business?
Intangible assets are those assets that have no physical entity. This type of asset allows the firm to be more radical, innovative and competitive in the business industry. Intangible assets belong to the business, though they are recognized from the company’s growth like brands, market leadership, intellectual property and customer relationships. In a practical world, intangible assets are those assets that are unique for every business in terms of their individual reputation, culture, knowledge, continuous growth and customer understanding.
Types of intangible assets
There are various types of intangible assets such as goodwill, brand equity, trained and assembled workforces, software, copyright, contracts, intellectual property and other assets which contribute to the company’s value and cannot be touched physically. Following is a brief explanation of the major types of intangible assets in business:
- Goodwill – When one company acquires another company, the difference between the transaction amount and the net assets acquired is considered as goodwill. As goodwill is intangible and has no physical characteristics, however, it is an important asset that helps to increase the value of a firm.
- Intellectual Property – Intellectual Property extends to a firm’s intangible assets and is owned solely by the company. These intangible assets include patents and trademarks, which protect the company from being copied or reproduced by others. The value of intellectual property is important for any business.
- Brand equity – The value of a brand is based on the quality of its products and services, advertising and marketing activities, corporate reputation and customer loyalty. Brand equity is one of the important intangible assets of a company that is derived from customers’ perceptions.
Benefits of valuing intangible assets
Typically, intangible assets are valuable and significant for a company. These assets are unique and powerful, which can be used to enhance the company’s position in the market. Here are a few benefits of valuing intangible assets:
- Intangible asset valuation is beneficial since it enables you to assess the performance of your intangibles, identify business areas that require improvement, and efficiently raise capital.
- The intangible assets of a business are subjective, which is important for various business-related transactions such as buying, selling, and licensing.
- During the internal valuation of management, intangible asset valuation enables you to understand and reflect on the contribution of employees in this particular position.
- In order to facilitate effective acquisition transparency and avoid overpaying, intangible asset valuation is important.
When should you value intangible assets?
Now that you know the importance of intangible asset valuation, when should you value these assets? Well, there are various instances in which you will require to value the company’s intangible assets. Here are some of the most common scenarios:
- Financial support – When raising capital or borrowing money from a bank, private institutions, or investors, you may need to mortgage some of the assets of your company. The firm will probably value intangible assets at this point.
- Financial reporting – When preparing financial statements, you may need to value the intangible assets of your business for financial reporting. Whether it is for purchase price allocation, impairment testing, or acquisition, intangible asset valuation is essential.
- Taxation support – Intangible assets are often assessed for taxation support. For the purpose of the estate or gift planning and for transferring intangible assets, you will need to value the intangible assets of your company.
- Dispute resolution – During the course of dispute resolution, intangibles are valued because it is a part of how claims are valued. Infringement, bankruptcy, and administrative claims, among others, rely on intangible asset valuation.
- Transaction support – When a company is considering a merger or acquisition, sale or purchase of assets, or licensing, intangible asset valuation is necessary. This process is used to ensure that both the buyer and the seller receive fair value for their assets.
Factors to consider while valuing intangible assets
There are various factors that you should consider while valuing the intangible assets of your business. Here are a few factors that play an important role while valuing intangible assets:
- When valuing intangible assets, you will need to be familiar with the definition and scope of intangible assets. The recognition of the intangible asset is a highly important step, which is related to how the company accounts for its intangibles.
- Valuing intangibles requires extensive due diligence, and meaningful data should be collected from all relevant sources. You need to ensure that you have access to all documents that are essential for valuation such as historical financial statements, reports, and corporate data.
- You need to look at all three valuation methodologies which are used in intangible asset valuation. Thus, choose the most appropriate valuation approach and validate the methodology by reviewing all relevant evidence.
Methods to value intangible assets
Probably now you have a fair understanding of intangible assets in a business, but you may be wondering about the methods to value intangible assets. Well, there are three main approaches that can be used for valuing intangible assets: the market approach, asset approach and cost approach. The following are brief descriptions of these methods:
- Market approach – The market approach is used to value the intangible assets of a business by comparing it with similar transaction prices or market prices. Basically, identical or comparable market-based transactions of intangible assets that have recently been exchanged at arm’s length help you to allocate the valuation of the company’s intangible assets. However, it is essential to have a credible source that can provide the data for comparison.
- Income approach – The income approach is the most popular method used for valuing intangible assets. In this approach, the value of the intangible asset is determined by estimating the future earnings, income, or potential of the company’s intangible assets. While the risks and financial costs are factored in and must be considered in this approach. The result reflects the Net Present Value (NPV) based on which the potential buyer can assess whether the NPV valuation is positive or negative.
- Cost Approach – The cost approach is one of the simplest methods to value intangible assets. In this method, the value of intangible assets is determined by using the estimated cost of their replacement. This includes all historical costs or replacement costs required in creating the intangibles to their current state, which is the sum of development costs, marketing costs, advertising costs, and other communication costs, As a result, the value of the intangible asset is equal to the estimated replacement cost of that particular intangible asset.
How to value intangible assets in Singapore?
Since intangible assets are impossible to touch and feel, it is important to maintain an effective and sound intangible asset valuation process. The appropriate method must be used to value intangible assets in Singapore. In addition to this, the following are a few tips that will help you to value your intangible assets effectively:
- Hire an expert – In order to accurately value intangible assets, you should hire an expert. They are usually well-versed with intangible asset valuations and will therefore be able to provide you with a more accurate valuation.
- Improve valuation inputs – During the process of valuing intangible assets, you need to include all the metrics, such as discount rate, risk factors, and estimated cash flows. Make sure that you have correctly assessed all the relevant data and that these inputs are based on accurate information.
- Clarify cash flow projection – To calculate the value of an intangible asset using the income approach, you will need to use the cash flow forecast. In order to accurately project future cash flows, you need to ensure that the business is analyzed thoroughly and all relevant data is collected.
- Adjust valuation methods – If you find some variables or data missing in your valuation process, don’t hesitate to adjust the valuation methods. Whether you are using the income approach, cost approach, or market approach, you can adjust the valuation process as and when necessary.
- Look for development – Valuers must look for new developments around the market that could change the metrics or inputs. Accordingly, they will need to update their valuation models by incorporating the latest market developments in order to provide a more accurate valuation.
Get your intangible assets valuation with Eqvista!
As you have seen, valuing intangible assets requires a lot of careful attention, research, calculation, and analysis. In order to get a reliable valuation, you need to consider various factors that affect the valuation. Why not rely on an expert? Well, it’s time to take the right steps and hire an expert to value your intangible assets. At Eqvista, we will provide you with a fair valuation of your intangibles and offer the most competent and reliable services. The team at Eqvista will work closely with you to deliver a comprehensive service that is tailored to your needs. Contact us today to know more about our services!