Introduction

Intangible asset defined as an asset that can be identified and not in a monetary form
that will provide future economic benefits to the organization regarding revenue from the sale
of products or services and cost savings. Under MFRS 138, research known as an original and
planned investigation when someone was gaining new scientific or technical knowledge and
understanding of subject matter. Besides, development is the application of research findings
or design for the manufacturing of new or considerably improved materials, devices, products,
processes, systems, or services before the commencement of commercial production or use
(Malaysian Financial Reporting Standards, 2011).

Miguel Angel Axtle-Ortiz (2013) proposed intellectual capital refers high value to the
company at Information Age, but due to the composition of intangible assets, it will even
produce even better economic value in short, medium and long term. There is only one way to
manage intangible assets is by being the focus on their composition and acknowledging their
value in the company. According to Lev and Schwartz (1971), Lev (1999, 2001), the intangible
assets of an organization make up its intellectual capital. It can be considered as one of the
sources of profit for the company that does not have any physical state. Andonova and Ruíz-
Pava (2016) set up the intangible assets as significant factors of organization performance in
an emerging country context. The intangibles assets such as brands, patents, franchising, and
licenses play an important role in the creation of competitive advantages in an aggressive buy
and sell environment.

Discussion

First and foremost, valuing intangible assets is far more complicated due to the value
that is not fixed. The value of intangible assets changed over the time. Therefore, the company
should reassess the value of intangible assets annually. Indeed, the challenges of valuing
intangible assets under MFRS138 would be faced by the company during the evaluation
process. One of the common challenges is the company fails to apply the defined premise of
value. Intangible assets have its purposes, for example, it may include the cost of replacement
estimation, setting a selling price, income taxes calculation, amount of damage claimed, and
value of property in the loan transaction. The premise of value is the supposed group of sales
or licensed transactional situation where the intangible assets of the company are being
analysed. For instance, when the standard of value in fair market value reflects on hypothetical
willing of demand and a hypothetical willing of a supplier, they will meet any possible

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marketplace. This also will show how intangible assets can make sales to the organization
through the willingness of demand or supplier. Also, they would know what kind of situations
they would enter into fair market view of the transaction.

The premise of value is normally chosen by the customer or the customer’s legal
counsel, as a use of the corresponding statutory authority, management rulings, or judicial
precedent. The premise of value has the possibility of chosen depending on the intangible
asset’s highest and best use (HABU). The HABU was known as the reasonably probable and
lawful use that was tangible possible, appropriately supported, financially feasible and
maximum profitability. However, there are alternatives premises of value such as value in
continued use as part of a going-concern business entity; value in place, but not in present use
in the production of income; value in exchange, as part of a systematic manner as well as value
in exchange as major aspect of a deliberate liquidation.

Furthermore, an insufficient data and inadequate market research could be the

challenge in valuing the intangible assets. For example, there was a country called New
Zealand where the intangible assets were rarely traded lead to insufficient transactions history
for their references for market research. It was extremely difficult to evaluate the intangible
assets due to the tremendously limited transactions history, in other words, insufficient reliable
data of intangible assets. Reilly and Schweihs (2014) found out that some intangible assets
analysts were taking shortcuts because of the engagement fees and time constraints or they
were not familiar with the public availability of the sales, licenses or royalty rate of the
transactional data sources. Mark (2011) proposed that the analysts should have conducted all
relevant research clearly by collecting the data that might significantly affect the valuation
conclusion to produce an effective valuation report. Therefore, the effective valuation report
should be able to persuade the report readers who concerned about concluded value, royalty
rate as well as transfer price.

The next challenge in valuing intangible assets under MFRS138 was inadequate due
diligence procedures. Due diligence was used by the accountant to investigate various
financial or business processes. The meaning of due diligence was to ‘have a measure of
prudence’ or to ‘perform a prudent review’ (Hayes & Aue, n.d.). Due diligence had common
procedures and almost similar with the audit procedure. The difference was due diligence was
a complete investigation that focused specifically on what has been asserted to the buyer and

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usually via the financial statements. However, if conducting proper due diligence might serve
as a strong legal defence to a third-party claim after a transaction closed.

In addition, common issues of inadequate due diligence procedures in the valuation of

intangible assets were related party transactions. Issues that regarding related party transactions
were often found during due diligence procedures. For example, the target company provides
off balance sheet guarantees for the transactions or liabilities of its connected companies for
the overall interests of the corporate body instead of business objectives. Another issue was
that application of accounting standards. For example, the target company recognizes income
on the cash basis and replace it to accrual basis with a purpose to underpaying or avoiding
paying relevant taxes. One of the issues was mortgaged or defective assets. The assets of the
target company might mortgage, or office premises might not have effective planning or
construction permits, or some premises might not provide certification of ownership for their
operating and available properties (Common Issues Seen in Financial Due Diligence, n.d.).

The due diligence procedures typically lead to the analyst’s preliminary estimate
intangible asset value. Intangible asset due diligence was not an exercise because it was used
only after a company suspected or experienced the materialization of a risk. When conducting
intangible asset due diligence, it is a must to understand the target company and then becoming
familiar with the company's intangibles. The company should monitor and conduct intangible
asset due diligence in both pre and post transactions (Moberly, 2014). The analyst may perform
two or more valuation methods within a single approach. For example, the analyst may perform
three different income approach valuation methods and then make up the three value to
conclude a single income approach value. At this point in the process, the valuation analyst
reconciles the various valuation approach. This various value will result in the analyst’s final
intangible asset value conclusion (Intangible Asset Valuation Approaches, 2012).

Besides, an arithmetic error in the valuation analysis was another challenge in

valuing intangible assets under “MFRS138”. Arithmetic errors can be said as numerical errors
or errors made in the calculation of numbers. Although arithmetic errors seem to be the easiest
report errors to prevent, it is also the most common errors made in the valuation of intangible
assets. All the mathematical calculation made in the report should be reviewed for accuracy.
Not only the texts in the reports must be reviewed, but the numerical values that involve in
calculation have to be noticed. This is because all mathematical values that were rounding up
will give impact to the report and affect the consistency. All data that involve in valuing the

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intangible assets, analyses, calculations and conclusions should be internally consistent
throughout the report (Valuing intangible assets provides new challenges, n.d.).

Intangible assets which include of goodwill, patent, trademark, and others also have
their value to be amortized. Thus, if the amount of amortization did not take into account in
calculation or miswritten the value can big a big impact in the intangible asset valuation.
Intangible assets can be a significant percentage of a company's total assets, and therefore have
a big impact on a firm's book value. In most cases, an analyst calculating book value will only
include those intangible assets that can be separated from the company and
sold. Goodwill cannot be separated from the company, so it is generally not included in book
value calculations. But a valuable patent can be sold and would be included in book value.
(Intangible Asset Valuations, 2016).

Furthermore, commonly made arithmetic error in the valuation of intangible assets is

the rounding off some cents in the value of intangible assets. In a case study of F&N Company,
it is stated that the arithmetic errors of intangible assets valuation make a big difference to the
financial report. The company's goodwill amounting RM 12788.21 but it is round off to RM
12788, trademark amounting RM 9972.41, written as RM9972 and the amount of patent is RM
11363.43 but stated as RM11363. So, the total value of intangible assets written is RM 34123
instead of RM 34124.05. Here, what we can conclude is the arithmetic errors made by the
company have reduced the value of intangible assets by RM 1.05. Small mistakes will bring a
great effect to the financial report. This is because other arithmetic errors made by the company
like calculating book value and amortization will together bring big changes to the value of
intangible assets.

There were many business sellers, business sellers as well as brokers who were too
relying on the rules of thumb method to establish a reasonable value range by comparing a
subject business against competition that could lead to several challenges and problems. Users
who have limited knowledge and experience regarding the actual transactions based on rules
of thumb method could lead to the misstatement of value. Users adopted rules of thumb such
as multiples of gross revenue to value the mastheads which are the name of newspapers
displayed at the top of the first page. This valuation method just measures the revenue of a
company, so it is not so reliable. Moreover, the value of a masthead is in direct proportion to
the gross revenue it generates fails to incorporate the basic business principle that the value of
a business or asset is a function of its actual net cash flows and profits rather than its gross

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turnover. (Lonergan, 1992) For example, larger media companies and certain publications fail
to value intangible asset in the company can lead to company nearly closed down. For example,
larger media companies and certain publications such as the Business Daily and National Times
to focus attention on gross revenue in assessing the value of mastheads causes failed in the
1980s. In addition, the companies are now closed (Lonergan, 1992).

Additionally, users lack information on rules of thumb method makes it extremely

difficult to make assumptions as they relate to the subject business. Rules of thumb cannot
determine the comparability of the subject business with the companies based on little data
because of inadequate information from rules of thumb. Next, users undervalued or overvalued
business also because of insufficient information on rules of thumb (Chapter six commonly
used methods of valuation, 2012). In summarize, valuation analyst should only use rules of
thumb as a sanity check because of these challenges and problems inherent to rules of thumb.

Last but not least, an inconsistent treatment can be the challenge in valuing intangible
assets. Valuing the value of a physical asset such as store and equipment is relatively easy.
However, intangible assets can be hard to assign a value. The problem of how to value such
assets has vexed accountants for decades (Monga.V, 2016).

To complicate matters, for intangible assets that aren't generating income, the
technology related to the asset may be too new to properly evaluate how much money it can
make for its owner or what competitive advantages it may offer (Valuing Intangible Assets,
2003). The valuation problem is that there is no standard formula exists for intangible asset
valuations. Valuation specialist has to concentrate on factors such as the significance of the
property to the company's product or process, the economic life of the property and the
competitive alternatives to its use. Although numerous valuation formulas and theories have
been suggested, nobody has yet come up with an entirely satisfactory solution (Intangible
Assets: Can you see the value? 2002).

Dr. Caroline Vance, director of consultancy Synchroni, and one of the co-authors of
the report mentions: 'Analysts feel intangibles are not dealt with consistently by organizations,
but introducing formal measurement and reporting may well not lead to greater clarity.' This is
a significant area of interest for businesses of all sizes; FDs of larger companies worried that
poor communication and valuation of intangible assets leads to stock price volatility, while
smaller companies were seeking to fund need to be able to demonstrate their true value.
(Intangible Assets: Can you see the value? 2002) The report also emphasizes a lack of trust in

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company balance sheets. Dr. Vance also pointed out that many analysts have little faith in the
transparency of balance sheets, often seeing them as an opportunity to obscure the true state of
affairs. There is a danger of creative accounting through the inconsistent treatment of
intangibles. According to Nick Winters, an audit partner at PKF: 'If you go away from bean-
counting, you will end up with a manipulative situation.' Such situation would be very difficult
to audit.

Conclusion

In conclusion, there are multiple approaches to solve these challenges in valuing the
intangibles assets. A market approach can be one of the approaches to solving the challenges.
The market approach measures the current value of future welfares by getting a general
agreement of what others in the marketplace have decided the value of intangible assets. Next,
cost approach seeks to measure the future welfares of possession by quantifying the amount
of money that would be needed to change the future service capacity of the subject property,
for example, “cost of renewal” of the intangible assets. The expectation behind this method is
that the price of getting the intangible asset is equivalent to the economic value of the service
that the asset provides during its specific period. While this method is not always accurate, it
may average out over a comparatively huge portfolio of intangible assets. Last but not least,
twenty-five percent rule also can be one approach to solve these challenges. This is an
approach widely used in the valuation of patents and technology. By using this approach, the
value of the intangible asset is calculated as twenty-five percent of the gross profit, before
taxes, from the companies’ activity in which the asset is utilized.