Calculated Intangible Value (CIV): Definition, Calculation, and Real-Life Examples
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Summary:
Calculated Intangible Value (CIV) is a method for evaluating a company’s intangible assets, which are non-physical assets like patents, trademarks, goodwill, and proprietary technology. Unlike traditional valuation methods, CIV offers a fixed value for these assets, making it a valuable tool for understanding a company’s true worth. This article explores the concept of CIV, its importance, and the steps to calculate it. By the end, you’ll have a comprehensive understanding of how intangible assets impact a company’s value and financial success.
Understanding calculated intangible value (CIV)
Calculated intangible value (CIV) is a critical concept in the world of finance and valuation. It provides a method for assigning a fixed value to a company’s intangible assets, which are assets that lack physical form but hold substantial value. These intangible assets include patents, trademarks, copyrights, goodwill, brand recognition, customer lists, and proprietary technology.
Importance of intangible values
Intangible assets can significantly impact a company’s financial health and success. They are distinct from tangible assets, such as inventory and fixed assets, which are visible and easier to value. Intangible assets may not be physically tangible, but they contribute to a company’s competitive advantage, revenue, and profitability. For example, a strong brand recognition, like that of Apple Inc., can influence consumer preferences, product design, and ultimately drive sales and profits.
Traditional valuation vs. calculated intangible value (CIV)
Traditionally, companies have valued their intangible assets by subtracting the firm’s book value from its market value. However, this method has limitations, primarily because market value is subject to constant fluctuations. As a result, the value of intangible assets using this approach can vary widely over time, making it an unreliable measure.
In contrast, CIV takes a more comprehensive approach to evaluating intangible assets. It considers factors such as a company’s pretax earnings, its average return on tangible assets, and the industry’s average return on tangible assets. By accounting for these variables, CIV provides a more stable and fixed valuation of a company’s intangible assets.
Steps to calculate CIV
Calculating CIV involves a structured process that incorporates several key factors. Here are the steps to determine a company’s calculated intangible value:
Step 1: Calculate the average pretax earnings
To begin, calculate the average pretax earnings for the past three years. This is a fundamental step in understanding a company’s financial performance over time.
Step 2: Calculate the average year-end tangible assets
Next, calculate the average year-end tangible assets for the same three-year period. Tangible assets include items like equipment, land, buildings, and vehicles.
Step 3: Calculate the company’s return on assets (ROA)
Calculate the company’s return on assets (ROA) by dividing the average pretax earnings from Step 1 by the average tangible assets from Step 2. This ratio provides insight into the company’s efficiency in generating earnings relative to its tangible assets.
Step 4: Calculate the industry average ROA
Calculate the industry’s average return on tangible assets for the same three-year period as in Step 2. This allows you to benchmark the company’s performance against industry standards.
Step 5: Calculate excess ROA
Determine the excess return by multiplying the industry average ROA (Step 4) by the average tangible assets calculated in Step 2. Subtract this excess return from the pretax earnings calculated in Step 1.
Step 6: Calculate after-tax excess return
Calculate the three-year average corporate tax rate and multiply it by the excess return. Deduct this result from the excess return to account for taxes.
Step 7: Calculate the net present value (NPV)
Finally, calculate the net present value (NPV) of the after-tax excess return. Use the company’s cost of capital as a discount rate. This step provides a fixed value for the company’s intangible assets that remains unaffected by market fluctuations.
What are some examples of tangible assets?
While intangible assets are non-physical in nature, tangible assets are the opposite. They include items like product inventory (raw materials, goods in process, finished products) and fixed assets (equipment, land, buildings, vehicles, etc.). Tangible assets are recorded on the balance sheet, but they are valued differently from intangible assets.
Comprehensive examples of intangible assets
Intangible assets are diverse and can take various forms across different industries. Here are some comprehensive examples of intangible assets:
1. Intellectual property
Intellectual property is a valuable intangible asset that includes patents, trademarks, and copyrights. For instance, consider a technology company that holds patents for groundbreaking inventions. These patents can be licensed or used to protect the company’s competitive edge.
2. Goodwill in mergers and acquisitions
When one company acquires another, a portion of the purchase price often accounts for goodwill. Goodwill represents the reputation and customer loyalty of the acquired company. It can contribute to future revenue and strengthen the acquiring company’s market position.
3. Brand recognition
A well-established brand carries significant value. Take the example of Coca-Cola, a company with one of the world’s most recognized and valuable brands. The brand’s recognition and reputation directly impact consumers’ purchasing decisions.
The role of CIV in business decision-making
1. Investment decisions
Investors and financial analysts use CIV to assess the value of a company’s intangible assets. By having a fixed valuation, they can make more informed investment decisions. For instance, an investor interested in a tech startup may use CIV to gauge the worth of its intellectual property and brand.
2. Selling a business
Business owners looking to sell their companies can benefit greatly from CIV. By understanding the value of their intangible assets, they can negotiate better deals and ensure they receive fair compensation for their brand recognition, patents, or customer lists.
3. Internal resource allocation
Companies use CIV for strategic purposes. It aids in resource allocation, helping organizations decide where to invest in developing or acquiring intangible assets. For example, a pharmaceutical company may use CIV to determine whether to invest in developing new drug patents or acquiring existing ones.
The bottom line
In the world of finance and business valuation, it’s often easier to calculate the value of tangible assets than intangible assets. Tangible assets are visible, quantifiable, and easy to understand. Intangible assets, on the other hand, present unique challenges in valuation due to their non-physical nature. For this reason, companies may opt to hire third-party business evaluators or appraisers to assess the value of their intangible assets accurately.
Intangible assets, despite their valuation complexities, play a crucial role in a company’s success. They can significantly influence a company’s ability to generate profits, compete effectively, and maintain a strong market position. As demonstrated by Apple Inc., investments in proprietary technology and brand recognition can have a profound impact on a company’s financial performance and market presence.
In conclusion, Calculated Intangible Value (CIV) is a valuable tool for understanding the worth of a company’s intangible assets. It provides a stable and fixed valuation in a world of constantly changing market values. By recognizing the importance of intangible values and understanding the steps to calculate CIV, businesses can gain a deeper understanding of their financial health and competitive advantage.
Frequently asked questions
What are some industries where intangible assets are particularly significant?
Intangible assets hold significant importance in industries like technology, pharmaceuticals, and entertainment. For example, tech companies heavily rely on patents and proprietary technology, while pharmaceutical firms invest in drug patents. In the entertainment industry, copyrights and brand recognition play a crucial role.
How does CIV impact a company’s balance sheet and financial statements?
CIV doesn’t directly impact a company’s balance sheet or financial statements. Instead, it offers a fixed valuation of intangible assets. However, this fixed value can indirectly affect a company’s financial ratios and overall financial health, as it provides a more stable measure of intangible assets.
What challenges do businesses face when valuing intangible assets using traditional methods?
Traditional methods of valuing intangible assets, which rely on market value, can be highly volatile. This volatility makes it challenging to assess the true worth of intangible assets over time. Additionally, traditional methods don’t consider factors like pretax earnings and industry standards, which CIV addresses.
Is CIV applicable to both small businesses and large corporations?
Yes, CIV is applicable to both small businesses and large corporations. The method provides a standardized way to value intangible assets, making it valuable for businesses of all sizes. Small businesses can benefit by understanding the worth of their intangible assets, while large corporations can use CIV for more accurate financial assessments.
Can CIV be used for personal financial planning or only for business valuation?
CIV is primarily designed for business valuation and assessing a company’s intangible assets. It may not be directly applicable to personal financial planning. However, individuals with investments in companies can indirectly benefit from CIV’s insights into a company’s intangible assets when making investment decisions.
Key takeaways
- Calculated intangible value (CIV) is a method for valuing a company’s intangible assets, which include patents, trademarks, goodwill, and more.
- CIV provides a fixed value for intangible assets, making it a stable measure compared to traditional valuation methods.
- Intangible assets, while not physically tangible, play a significant role in a company’s financial success and competitive advantage.
- The steps to calculate CIV involve a structured process, considering factors like pretax earnings, return on tangible assets, and industry standards.
- Despite their complexities, intangible assets are vital in driving profits and maintaining a strong market position, as seen with companies like Apple Inc.
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