Explain the usage of 'excess profits method' for valuation of intangibles.

'Excess Profits Method' in reference to intangibles looks at the currents value of the net tangible assets employed as benchmark for an estimated rate of return. This is used to calculate the profits that are required in order to induce investors to invest into those net tangible assets. Any return over and above those profits required in order to induce investment is considered to be the excess return attributable to Intellectual Property. While theoretically relying upon future economic benefits from the use of the asset, the method has difficulty in alternative usage of assets. But worldwide, future economic benefits are used to arrive at current valuation of intangible assets. The excess operating profits method determines the value of the intellectual property by capitalising the additional profits generated by the business owning the property over and above those generated by similar businesses, which do not have the benefit of the property. There are various ways in which the excess profits may be calculated, for example by reference to a margin differential or comparing the return on capital employed earned by the business owning the property with that earned by companies without such benefit. The calculated excess operating profits expected to be earned over the life of the asset in question are then discounted to the present day to arrive at a value for the asset. It is important, if using this method, to ensure that the excess profits identified are specifically attributable to the intangible asset in question and not to some other factor such as an efficient production facility or distribution network that relates to the business as a whole.