Mention the term ‘intangible assets’ to many finance professionals, and in all likelihood you will be met with a faint nod of recognition and/or subtle glazing of the eyes, followed by a swift entreaty to move on to ‘core’ matters, such as traditional financial instruments or physical property.
As distinct from tangible assets – such as vehicle fleets, computer hardware, factory equipment or real estate – intangibles are often considered somewhat ephemeral. They’re not ‘stuff’. You can’t get your hands on them.
But to consider them in any way ‘non-core’ is to miss the point. For intangibles comprise a massive engine room of the world economy, the effect of which – in financial terms – is more than comfortably tangible.
In October, specialist valuation consultancy Brand Finance published its latest Global Intangible Finance Tracker (GIFT): an annual, global survey of the economic performance – and scale – of intangible assets. Its findings were startling. For example:
Make no mistake: this is big money – and it’s being left undocumented.
For thoughts on why this amounts to corporate self-sabotage, look no further than Brand Finance CEO David Haigh. “Insufficient reporting of intangible assets leads to a host of problems for analysts, investors, boards and stakeholders,” he said.
“With little information on particular assets, analysts’ assessments are not as accurate, forcing investors to act with one eye closed. This, in turn, has negative effects on share-price volatility, affecting the stability and sustainability of finance.”
Haigh noted that the “lack of granular information about the true value of assets leaves boards and shareholders prone to hostile takeovers, or selling and licencing individual assets below competitive prices”.
For Haigh, intangibles are a cornerstone of any organisation’s broader financial condition. “A commitment to undertake an annual revaluation of all company assets – including tangible assets, acquired intangibles and intangibles generated internally – would be a boon for boards, accountants, investors and analysts,” he pointed out.
“Newly gained transparency and clarity,” he added, “would enable boards to make more effective use of their assets, accountants to have a more detailed picture of asset values, and investors and analysts to more accurately price shares.”
For many businesses, Brand Finance notes, intangibles form the greater part of their total value. However, under current financial reporting rules, disclosing them is typically required only during M&A procedures, “resulting in no knowledge of the worth and business importance of intangibles unless they are subject to an acquisition”.
But even under those circumstances, there is often a lack of clarity.
According to the latest GIFT, the past year has been marked by a pronounced decline in the ‘granularity’ – or detailed categorisation – of intangible assets reporting, as the gap between disclosed intangibles and so-called ‘goodwill’ widens dramatically.
As Brand Finance explains, goodwill “is a premium paid over the fair value of assets in the event of a company being purchased, and is sometimes used as a shortcut to avoid performing a more granular valuation of intangibles”.
Indeed, the consultancy notes, the value of goodwill that corporates have listed in the past year eclipsed that of disclosed intangibles by a margin of $2.3 trillion – a significant rise on the $1.8 trillion difference recorded last year.
So, in the interests of helping corporates get more specific about their intangible assets, which sorts of holdings should they be looking to disclose?
From internally generated skill sets and materials to the primary branches of intellectual property (IP), here are 11 different types of intangible assets…
As different companies work in different ways – even if they are operating within the same markets – they will often devise their own, unique methods and processes for executing particular tasks, whether on the production line or in admin. The body of knowledge about those procedures that is diffused throughout the staff base falls under the umbrella heading of ‘knowhow’, and may be formalised in training materials – or potentially even…
Any computer programs designed to expedite unique working methods are important components in your company’s infrastructure. Whether you have devised them in-house, or bought them in from external contractors as bespoke solutions, they have an intrinsic value based upon the assistance they provide. You may not intend to release them to the wider market, but within the context of your firm, they are measurably driving output.
Any manuals your firm has published to enshrine its internal lore (for example, knowhow, software or training advice) on the printed page will fall within the orbit of copyright: an IP right automatically conferred upon the creator by the act of producing the material. So, should any of your publications have a potentially wider appeal among, say, your business partners, you can either sell or license out that copyright, enabling them to reproduce the relevant content. Copyright also covers anything that appears on your corporate website, and any sites you have set up to promote specific products, services or subsidiaries.
This takes two different forms: either the level of authority and respect that your firm has acquired within its particular industry, or the condition of its ethics. An authoritative and respected firm is more likely to attract business than one that has yet to be considered such – as is a firm with a widely acclaimed ethical stance. That greater likelihood of attracting business is eminently measurable, and will be a driving force behind your…
On a corporate level, your firm will sit within a sprawling network of interests and ties, covering the terms you are on with your customers and the arrangements you have forged with your commercial partners. Each of those links and associations will mean something in financial terms, and will typically lead to various…
Several years ago, analysts at Gartner estimated that 60–80% of all business transactions are governed by some form of contract, while PwC said that a large organisation will have anything between 20,000 and 40,000 contracts under management at any one time (citation here). Today, those figures are likely to be much higher.
Each of the documents in which your partnership deals are sealed will have monetary value attached to it. The same applies to any licensing deals that your firm has struck with its business partners – allowing them, for example, to manufacture products based on innovations you have devised – of which we will say more very shortly…
What sort of clout does your company name wield in the marketplace? Which doors does it open that may remain closed to your smaller competitors? And how can you quantify that commercial edge in a figure that could sit on a balance sheet?
If you are a wise business owner, you would have registered your company name and logo as trademarks, granting you the exclusive right to carry out business under your chosen brand identity. If your firm happens to be a multinational, you would also have obtained coverage across every territory in which it does business. And you would have gone through the same process for all the product lines or subsidiaries that your firm has launched.
Like any other asset class, trademarks can be bought and sold or licensed out – and the more commercially successful a trademark is, the higher its market value will be. Richard Branson, for example, has pretty much based his entire business model on licensing out the Virgin brand and slapping it on different products and services. The business that your trademarks generate can be calculated and listed.
Any business, product or service with a trademark and an internet presence will also have an accompanying domain name, obtained through formal registration. Indeed, depending on the territories in which your brand operates, you may have registered the same URL string with multiple different suffixes – such as .co.uk, .eu, .au, .fr or .de. Domain names can mature into powerful, commercial bargaining chips, and can attain extraordinary valuations.
Innovative firms that come up with new or improved mechanical or digital tools will routinely file patents on those inventions, in efforts to preserve exclusivity and, therefore, competitive advantage. The patent sales and licensing market is vast, and in the course of their lives, some multinationals amass thousands of individual patents – most of which will, at some point in their life cycles, have significant commercial value.
In January this year, for example, IBM announced that, in the course of 2017, it had received 9,043 patents from the US examining board. That marked the 25th consecutive year in which IBM was named the US’s top patenting company. Indeed, since 1993, when that glittering run began, the firm had registered more than 105,000 patents.
The stylistic ‘look’ of a product can also be protected in an IP registration and licensed out to other companies. So, if you happen to have dreamt up a particularly groovy juice squeezer or easy chair, that flight of visual fancy isn’t just a dream – it’s hard cash, too.
To find out more about the main branches of IP, visit the website of the UK Intellectual Property Office.
Matt Packer is a freelance business, finance and leadership journalist who has also written extensively about IP