Calculated intangible value (CIV) is a formula used to determine the value of a company’s intangible assets. It involves calculating the excess return on assets, subtracting taxes, and discounting the result. Critics argue that intangible assets are subject to depreciation and fluctuation in value.
The calculated intangible value of a company is a means of placing an accurate value on the intangible assets currently owned by the company. Not to be confused with the net present value (NPV), which is one of the factors that are accounted for in the process, the calculated intangible value is achieved by a specific formula that examines the current book value of the company. The cumulative book value is then subtracted from the current market value of the asset.
The process of arriving at the calculated intangible value begins with the determination of several key pieces of information. As part of the CIV calculation, you need to confirm the company’s average pre-tax earnings for the last three calendar years. Using the same three-year period, the year-end average for tangible assets is also taken into account, 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 calculated by multiplying the industry’s average return on assets by the company’s average year-end tangible assets. The resulting figure is then subtracted from the average pre-tax earnings for the three-year period.
Next, determine the average corporate tax rate for the period and multiply that amount by the over-report. Subtract this figure from the excess return. This process produces a figure known as the after-tax surplus. The last step is to calculate the net present value of this figure and then discount the result using the company’s cost of capital as the discount rate. This final figure will represent the calculated intangible value of the company.
Understanding the calculated intangible value of the company’s intangible assets for the cited period is a valuable means to help assign an accurate and stable value to those assets. However, opponents of the entire process associated with determining a calculated intangible value believe that the figure has no lasting significance, since even intangible assets are subject to depreciation and will fluctuate in their actual value.
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