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JOURNAL OF INTERDISCIPLINARY RESEARCH

DETERMINING CARRYING AMOUNT OF INTANGIBLE ASSETSS USING MODIFIED INCOME-
BASED AND ASSETS-BASED VALUATION METHOD DIFFERENCE

TOMÁŠ KRULICKÝ,

VERONIKA MACHOVÁ,

ZUZANA

ROWLAND

Institute of Technology and Business, School of Expertness and
Valuation, Okruzni 517/10, 37001 Ceske Budejovice, Czech
Republic
email:

krulicky@mail.vstecb.cz,

machova@mail.vstecb.cz,

rowland@mail.vstecb.cz

Abstract: Company assets are classified into financial, tangible, and intangible. In
particular, valuation of intangible assets is a demanding task for companies, although
in certain cases, the obligation of assets valuation is imposed by law in the Czech
Republic. Professional literature related to intangible assets valuation was analysed.
The objective of the paper is to determine the carrying amount of intangible assetss
through the application of modified method for its valuation with regard to the nature
of the assets structure of the model association XYZ. The resulting value of intangible
assets was determined based on the difference of assets-based and income-based
valuation methods.

Keywords: intangible assetss, assets-based valuation method, income-based valuation
method, DCF, carrying amount, association.

1 Introduction

In the field of expert activities, experts often encounter the issue
of business valuation for various reasons. One of the common
causes of the necessity of business valuation is the
transformation of its legal form of business. In any case of the
transformation of business legal form, the existing entity is
required to carry out the valuation of its assets, which will enter
into the newly established company with a different legal form,
thus representing initial accounting positions of the individual
assets items

(Rowland et al., 2019; Mareček, Horák, and Hejda,

2019). In the Czech Republic, this obligation arises under the
Accounting Act (Czech Republic, 1991).

This paper will be focused on the transformation of the legal
form of business of a model association of two natural persons
into a limited liability company (LLC), which has legal
personality. The model association XYZ operates in the
manufacturing industry and is focused on B2B (business to
business) market, which can be characterized as business
between two legal persons characterized by high volumes and
lower supply heterogeneity compared to B2C (business to
consumer) market where business relationships between trading
companies and final customers through a wider offering
portfolio. The valuation of the model association XYZ will be
carried out as of 31 December 2017, when the activity of the
model association XYZ will be terminated in its existing form
and will start its operation in the market as a LLC.

In terms of the type of assets, the assets invested in the newly
established company are classified as financial, tangible, and
intangible.

The objective of the paper is to determine the carrying amount of
intangible assets through the application of selected modified
method for its valuation with regard to the nature of the assets
structure of a model association XYZ.

2 Literature Research

In the case of establishing an association of two or more persons,
on the basis of the Civil Code (Czech Republic, 2012), its
members are obliged to determine the internal relations of the
individual members of the association by a contractual
agreement.

An association or any form of a business with or without a legal
personality may feel the need for transformation for many
reasons. One of the reasons may be business sustainability as a
whole (Hašková et al., 2019). Loranzo (2013) dealt with the
identification of companies´ individual problems that may hinder

their development or are directly responsible when a company
ceases to exist. On the basis of the identification of such
problems, the author claims that in certain cases, companies have
to change their internal and external structure in order to survive
in the current market and to eliminate or at least reduce the
problems they suffer from.

In the Czech Republic, the transformation of the association into
a limited liability company imposes the obligation to determine
the carrying amount of the input assets entering into the newly
established limited liability company on the basis of the law
(Czech Republic, 1991).

This obligation is not subject to a change of the existing business
model the company uses for its operation, e.g. B2B or B2C
market. According to Lilien (2016), these types of markets are
not paid sufficient attention to in the form of scientific research.
Both types of market have high potential for generating valuable
academic contributions. It is very important for B2B companies
to maintain their brand as it only may help potential customers
know this complex and complicated market. Brand also helps
customers in the decision-making process of purchasing goods
and services (Davis, Golicic, and Marquardt, 2008). Sila (2013)
also adds that both B2B and B2C markets have been influenced
by digitalization and e-commerce for several years. In this case,
these markets are designated B2B EC and B2C EC (electronic
commerce).

Assets valuation is regulated by the Act on Valuation of Property
and on the Amendment of some other Acts (Property Valuation
Act) (Czech Republic, 1997). Pursuant to this Act, assets and
services are valued at normal price, if not stipulated otherwise by
this Act. For the purposes of this Act, normal price is the price
that would be achieved by selling the same or similar property or
providing the same or similar services in the ordinary course of
business in the Czech Republic on the valuation date when
considering all circumstances that could influence the price but
excluding the effects of extraordinary circumstances on the
market, personal situation of the seller of buyer, or pretium
affectionis. This regulation also applies to the value of intangible
assets. According to

Svačina (2010), intangible assets include

also copyrights, related work, software, and databases. Penman
(2009) states that the company accounting is often criticized for
the absence of items constituting its intangible assets in the
balance sheet although intangible assets value can be determined
based on the profit and loss account. Wyatt and Abernerthy
(2008) dealt with financial reporting of intangible investments.
However, investments in the company intangible assets can also
harm the reputation of the company, thus reducing its overall
value. It is very important to understand the way the company
intangible assets influences its value and find the best method for
its valuation. According to Generally Accepted Accounting
Principles (GAAP), it is required to enter the company intangible
assets in its financial statements immediately after its creation
(Ježková et al., 2020). Banker et al. (2019) points to the fact that
intangible assets create a value for business in the future.
Therefore, its immediate valuation is impossible and its value
cannot be correctly estimated and thus enter in the company
financial statements. According to Dischinger and Riedel (2011),
company´s intangible assets are an easy tool to transfer assets
between subsidiaries due to lack of transparency of the internal
valuation processes of such transfers. If intangible assets are
transferred from the company, such a company is bound by a
lower tax duty to the state. This is emphasized by the fact that
the lower the corporate income tax rate, the higher the amount of
its intangible assets is

(Vochozka, Rowland, and Šuleř, 2019).

According to Ittner (2008), in the field of business performance
measuring, there are many discussions whether it is possible to
measure the business economic performance using internal
measuring of intangible assets. However, in many cases, the
value of intangible assets is determined by the price movements
of individual commodities the given company cannot influence

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