What is a Calculated Intangible Value?

The calculated intangible value of a company is a means of placing an accurate value on the intangible assets currently in the possession of the corporation. Not to be confused with the net present value (NPV), which is one factor that is accounted for in the process, the calculated intangible value is arrived at by a specific formula that looks at the current book value of the company. The cumulative book value is then subtracted from the current market value of the business.

The process of arriving at the calculated intangible value begins with determining several key pieces of information. As part of the CIV calculation, it is necessary to confirm the average pretax earnings of the company for the past three calendar years. Using the same three year period, the year end average for tangible assets is also factored in, along with the company’s return on assets.

The next step in determining the calculated intangible value begins with determining the average return on assets for the industry of which the company is a part. Excess return on assets is factored by multiplying the industry average return on assets by the average year end tangible assets of the company. The resulting figure is then subtracted from the average pretax earnings for the three year period.

Next, determine the average corporate tax rate for the period, and multiply that amount by the excess return. Subtract this figure from the excess return. This process produces a figure that is known as the after-tax excess return. The last step is to calculate the net present value of this figure and then discount the result using the company’s capital cost as the discount rate. This final figure will represent the calculated intangible value of the corporation.

Understanding the calculated intangible value of the company’s intangible assets for the period cited is a valuable means of helping to assign an accurate and stable value to those assets. However, opponents of the whole process associated with determining a calculated intangible value believe that the figure is not of any lasting importance, since even intangible assets are subject to depreciation and will fluctuate in their real value.