Valuation of Intangible Assets:

International Accounting Standard 38 requires the entity to recognise an intangible asset, whether purchased or self-created if, and only if:

• it is probable that the future economic benefits that are attributable to the asset will flow to the entity; and
• the cost of the asset can be measured reliably.

The intangibe assets can be valued based on Cost Model or Revaulation Model.

Cost model. After initial recognition intangible assets should be carried at cost less accumulated amortisation and impairment losses.

Revaluation model. Intangible assets may be carried at a revalued amount (based on fair value) less any subsequent amortisation and impairment losses only if fair value can be determined by reference to an active market.

Valuation process:

• If the Intangible asset has Independent and Cash flow generating ability, then Estimate expected cashflows from the product or service and discount back at appropriate discount rate.
• If the Intangible asset does Not have independent and cash flow generating ability to the firm, Compare Discounted Cash Flows value of firm with intangible with firm without (if you can find one), assume that all excess returns of firm are due to intangible.
• If the Intangible Asset has No cash flows now but potential for cashflows in future,

1. Value the undeveloped patent as an option to develop the underlying product.
2. Value expansion options as call options
3. Value abandonment options as put options