Financial Analysis: A Controller’s Guide, Second Edition

Chapter 8. Intangible Asset Measurement and Performance Enhancement

The preceding chapter covered a number of methods for increasing shareholder value through such traditional routes as the enhancement of cash flows, cost reduction, attention to tax rates, and breakeven analysis. Another business area having a significant impact on shareholder value is intangible assets, though it is much more difficult to analyze.

Intangible assets are derived from a number of areas, including trademarks, patents, branding, internal processes, and employee knowledge. These assets are extremely difficult to quantify, but have a strong perceived value in the marketplace, sometimes to such an extent that the market value of a company is primarily driven by its intangible assets.

Though it is not possible to precisely quantify the impact of intangible assets, it is even more dangerous to ignore them, since so much of a company’s value is derived from them. Thus this chapter describes the theory behind the valuation of intangible assets, as well as the measurement techniques available for various components of intangible assets.

Value of Intangible Assets

If a company facility is obliterated by a natural disaster and all of its physical assets are destroyed, the company may still have a great deal of value as long as its employees survived. The reason is that physical assets cannot be applied to the production of goods or services without a process flow that is organized and monitored by employees. Further, ...