Given that intangibles within the business creates the tangible results which we can see, intangibles does have huge value in determining the success and degree of success of an existing business. How do we value this, and justify the value?
There are relevant accounting standards to value intangibles. Perhaps a company’s intangible assets are valued by subtracting a firm’s book value from its market value. This eventually shows up as goodwill after the merger and needs to be amortized. However, opponents of this method argue that because market value constantly changes, the value of intangible assets also changes, making it an inferior measure.
On the other hand, the calculated intangible value takes additional factors into consideration, such as the company’s pretax earnings, the company’s average return on tangible assets, and the industry’s average return on tangible assets. Other considerations include market comparable value for IP, patents, trademarks etc.
All in all, valuing intangible assets is in the eye of the beholder is most of the cases, is qualitatively debated among the parties and eventually becomes part of the goodwill/discount on the transaction.