Dear Fumi,
Thank you so much for your thirteenth message. My comments follow.
Sincerely,
Prof. S. Stiner
s2396055@slb.cgu.ac.jp wrote:
>
> Dear Dr. M. Susan Stiner,
>
> I appreciate your last message.
>
> Last Saturday I took English Accounting Test in Tokyo.
> There are four grades for that and I took third grade. I hope
> it will be my first step to get professional skills.
> I will tell you whether I pass or fail the exam this month.
> In the webpage, I noticed the following.
> There are three generally accepted procedures for estimating
> fair market value. The third method, income forecast, is generally
> used for income-producing intangible assets such as technology,
> particularly where the assets are truly relevant to the specific
> business and are not capable of being readily replaced or replicated.
> Income forecast method analyzing the present value of free
> cash flows generated by the product line over the remaining economic
> life of the technology associated with it.
> It is important to remember that in-process R&D must be expensed
> if it has no alternative use. During the acquisition process, discussions
> held with management usually indicate how much of the technology is unique
> to the product lines and how much, if any, may have an alternative use.
>
> I quoted this but actually it was hard for me to understand this.
> Please give me some advice.
>
>
> Sincerely yours,
> Fumi
Fumi, here is my explanation:
If intangibles are to be on the Balance Sheet, they must have a value.
There are several ways to value intangibles. One way is the income
forecast method. This means to value the asset every year as a fraction
of the income that we expect to make from the asset. The expected
income is the "income forecast." The forecast may or may not actually
equal the income really generated by the asset. That depends on how
good our crystal ball is. But the forecast should be close. This
method is appropriate for businesses that use technology. For example,
suppose a drug company modifies a gene to produce a certain protein that
the company sells to cure a certain disease. The gene modification
process is an intangible asset. The company can estimate revenues over
a certain period. The present value of the revenue stream is
calculated. Each year, the asset value is measured in terms of the
present value of the anticipated revenues. The value can change from
one year to the next, depending on how much or how little the company
expects to earn from the asset. If a company has a unique process, then
it can expect high earnings. If other companies have figured out how to
do the same thing, the first company will earn less.
Lots of companies are acquiring other companies. If the target
company (the one acquired) has that type of intangible asset, the
acquiring company wants to know if that intangible will appear on its
books and for how much.
I know the English was hard, and did not mean for you to spend a lot of
time on it. I hope this helps.
I am sorry this message is late. I just returned from my 35th
(thirty-fifth) high school reunion. This is the website for our class:
---------------------------------------.
We all look different after 35 years. Our name tags had two parts: our
graduation picture and our maiden names. None of us remember each other
by our married names, since we were all single while in school. We
rarely see anyone from our schools after graduation. We only remember
the way we looked back then. So the name tags helped a lot! We spent
four hours talking, remembering, eating and listening to some of the hit
music of 35 years ago. It was a wonderful afternoon!
Does Chuo Gakuin have reunions for its graduates? Do you plan to go to
them?
--
Prof. M. Susan Stiner