Unseen and undervalued – A brief introduction to intangible assets
Article | December 30, 2022
Unseen and undervalued – A brief introduction to intangible assets
Unseen and undervalued – A brief introduction to intangible assets
Intangible assets are more important than you think.
In 1975, intangible assets accounted for 17% of the value of S&P 500 companies, but in 1995 this raised to 46% and in 2018 intangible assets accounted for a massive 85%. To be clear, that’s $19 trillion USD.[1] Clearly, value is now heavily vested in the things we cannot touch and see.
As intangible assets play a major and growing role in generating value for companies, it’s important that these assets are accounted for properly. Companies who think they do not have any intangible assets are generally wrong. This is even more important in the general economic trend towards a more knowledge-based economy.
The difficulty in accounting for intangible assets is they are often unseen and not well understood. In contrast, tangible assets, such as land and equipment, tend to be easily accounted for. Most intangible assets are not reported on balance sheets because accounting standards do not recognise them until a transaction has occurred to support their value. As a result, it can be difficult to insure against or reduce the risk of losing intangible assets.
What is an intangible asset?
So, what exactly is an intangible asset? Simple: an asset that is not physical. But this simplicity actually belies the complexity of properly understanding intangible assets. And it’s led to some common myths, misunderstandings and misconstructions of what defines an intangible asset.
The term “intangible asset” is a broad umbrella that includes many different types of assets. Intellectual property is a term often used in place of intangible asset, but it’s important to realise that IP is only one type of intangible asset.
The most common types of intangible assets include:
- Patent
- Trademark
- Design
- Copyright
- Trade secrets
- Proprietary software
- Brand and reputation
- Research and development
- Critical suppliers and customers
- Organisational knowledge
- Strategy and Market Intelligence
- Know-how
This list is not exhaustive, and the intangible assets held by one organisation may be different to another organisation.
Intangible assets can be grouped into two main classes: those that are registrable which include patents, trademarks and designs, and those that are not registrable
Knowing what intangible assets may be present in an organisation is one thing; but identifying and then protecting them is something entirely different. Some intangible assets are easier to identify, such as a design to protect the shape and appearance of a product or a patent to protect and invention. Others are more difficult, such as having the trade secrets, know-how and structures in place that allow the product to the invented and designed in the first place.
When looking to leverage intangible assets, it’s important to look at them as a whole and the relationship between each type of intangible asset – as the strategy to protect and exploit them for one organisation will be different to another organisation.
The Industry Corp example
Let us take the example of a fictitious company Industry Corp that has a R&D program that allows them to bring products to market faster than their competitors. How should they protect their intangible assets? It all depends on Industry Corp’s commercialisation strategy.
In a first scenario let us assume Industry Corp’s commercial strategy is to sell many low value products but these products have a short lifetime. In a second scenario Industry Corp’s commercial strategy is to sell few high value products but these items have a long lifetime. Patents can be used to protect the products in each scenario, but they do not always represent the best value proposition.
In the first scenario, the cost of obtaining granted patent rights, especially if the products have a lifetime significantly shorter than the term of the patent, may not be a good investment, whereas in the second scenario patents may present a much better investment.
Stepping back and seeing clearly
But simply looking at patents as a form of protection misses the bigger picture. If Industry Corp’s R&D program allows them to design, manufacture and sell products faster than their competitor, then the structure and knowhow of the R&D program may have a value that is greater than any patent portfolio of the products they produce.
The question then becomes: what makes the R&D program is so special? Does the R&D program have (i) a few key inventors and designers, (ii) different groups that work well with one another, or (iii) a proprietary workflow that allows rapid product development? What about if Industry Corp instead developed a large user dataset that allows them to know what the customer wants and that none of their competitors have.
Each of these intangible assets contribute to the overall value of Industry Corp, but they must be valued, protected and managed differently. Accordingly, once each Industry Corp’s intangible assets are identified and considered, attention can then turn to how best to protect them.
The way each intangible asset is protected requires an understanding of the value of each asset and the interrelationship between them. However, the best way to manage and protect intangible assets is largely dependent upon the company organisation, resulting in tailored management and protection regimes. For example, if the R&D program is underpinned by the few key inventors and designers, ensuring that their knowledge of the technology area is not lost to another company or, worse yet, the public, would be a first step in securing these assets.
Seeing the unseen
The above is merely an overview of how intangible assets play a major role is adding value to companies and how they need to be protected and managed. However, before these assets can be protected, they first need to be identified.
