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 and other intellectual property, brand equity and proprietary technology.
Understanding Calculated Intangible Value (CIV)
Usually, 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. Finding a company's CIV involves seven steps:
- Calculate the average pretax earnings for the past three years.
- Calculate the average year-end tangible assets for the past three years.
- Calculate the company's return on assets (ROA).
- Calculate the industry average ROA for the same three-year period as in Step 2.
- 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.
- Calculate the three-year average corporate tax rate and multiply by the excess return. Deduct the result from the excess return.
- Calculate the net present value of the after-tax excess return. Use the company's cost of capital as a discount rate.