Calculated Intangible Value (CIV)

What Is Calculated Intangible Value (CIV)?

Calculated intangible value is a method of valuing a company's intangible assets. This calculation attempts to allocate a fixed value to intangible assets that won't change according to the company's market value. An intangible asset is a non-physical asset. Examples of intangible assets include patents, trademarks, copyrights, goodwill, brand recognition, customer lists, and proprietary technology.

Because an intangible asset has no physical form and isn't easily converted to cash, calculating its value can be challenging. However, there are times when calculating the value of intangible assets becomes critical. For example, owners looking to sell their company may hire a business appraiser to specifically value the company's intangible assets.

Understanding Calculated Intangible Value (CIV)

Frequently, a company's intangible assets are valued by subtracting a firm's book value from its market value. 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.

Determining the Calculated Intangible Value (CIV)

Finding a company's CIV involves seven steps:

1. Calculate the average pretax earnings for the past three years.
2. Calculate the average year-end tangible assets for the past three years.
3. Calculate the company's return on assets (ROA).
4. Calculate the industry average ROA for the same three-year period as in Step 2.
5. Calculate excess ROA by multiplying the industry average ROA by the average tangible assets calculated in Step 2. Subtract the excess return from the pretax earnings from Step 1.
6. Calculate the three-year average corporate tax rate and multiply it by the excess return. Deduct the result from the excess return.
7. Calculate the net present value (NPV) of the after-tax excess return. Use the company's cost of capital as a discount rate.

The Bottom Line

It's much easier to calculate an accurate value for tangible assets than intangible assets. Tangible assets — such as product inventory, buildings, land, and equipment — are visible and simple to understand. Because intangible assets are more difficult to value, companies may choose to hire a third-party business evaluator or appraiser to perform the intricate task of identifying the company's unique assets and placing a value on them. When a company is for sale, this process becomes more critical as questions regarding asset value can lead to disputes between buyer and seller.

Despite the valuation difficulties posed by intangible assets, these assets can play a huge role in a company's success. Apple Inc. (AAPL), for example, has spent considerable money and time to develop its proprietary technology and brand recognition — which can be seen in the company's product design, logos, packaging, and slogans — all of which impact Apple's ability to generate profits and sales.