Valuation of 21st century assets: intangibles

Investments in intangible assets is ascertained to be in excess of trillions of dollars at present, several investment banks and accredited research companiesestimate a varying trillions if  dollar investments in intangible assets globally. Business stake holders question the capitalized value of these intangibles, they question whether value estimated is informative and conservative to rely on. Hence emergence of intangibles requires a need for clear understating and estimates of value invested or capitalized in intangibles that further require fair and well defined principals of accounting and valuation.

Emergence of Intangibles Assets

Until during 20th century, tangible assets were considered to be the main source of commercial and economic value. Fixed asset such as buildings, land, manufacturing units were considered to be the main drivers of economic value or the financial assets such as stocks, bonds and derivatives would serve purpose. Till then only fixed assets or financial assets were presented in the financial statementsand were valuedbased on their cost and/or outstanding value. Even today the priority of company’s evaluation is based on profitability and performance and the focus is still on fixed or financial assets excluding intangible assets, for example, estimating return on investments, evaluating the value of tangible assets or equityor bonds or derivatives etc. Because there is no significant value of intangible assets present in the accounting books or financials, therefore they are not included in performance evaluations, such as relative and absolute price, and book value ratios etc.

But in the past two to threedecades of the 21stcentury the awareness of creating value for shareholders has changed dramatically. Stakeholders view intangible assets like Research and development, brand name, technology, patents etc. as the main drivers of value creation. Investment in intangible assets is growing fast, in some cases investment in intangibles exceeds investment in traditional capital such as machinery, equipment and buildings. Intense global competition, connected multinationals, informative and specialized boutique companies, emerging business models, and the growing importance of the services sector have all togethermagnified the importance of intangibles to firms, industries and economies.

The global business environment is focusedon policies that help in accumulation of intangible value and seek to provide new sources of growth. Intangibles are addressed well in developed economies but concerns also exist that stakeholders might undermine investment in intangible assets. Policymakers in many emerging economies are recognizing the need of developing intangible assets is necessary for value addition.

Belowlisted are some of theprimary reasons that require business valuation or accounting of intangible assets:

  • Intangibles are the main driver of modern economies. Ways to quantify investment in intangible assetsare required to recognize and exploit opportunities in businesses. Modern businesses rely onsurveys, patents registered, royalty and licensing transactions, spending on R&D or designetc. to ascertain the trend.
  • Determining price of an intangible or a combination of intangibles in transaction pricing and structuringthat require sale of intangible, allocation of equity in a new venture wherein investors contribute different intangible assets and or asset allocation in the process of liquidation as at instances investors receive intangible assets in exchange for their ownership.
  • Intercompany usage and ownership transfer requiredfor transfer of intangible assets to a subsidiary. Appropriate cost allocation and inventory pricingis requiredwhere development or usage of an intangible is shared by multiple entitiesthat might be related or unrelated.
  • Purchase price allocations of acquired assets in a business combination, goodwill and asset impairment testing and or accounting for assets of a re-organized entity require financial accounting and fair value reportingthat is implied by government and regulatory authorities.
  • Tax planning and accounting compliance is also required for purchase price allocations, depreciation and amortization for purchased assets, charitable contribution deductions for donated intangible assets, intercompany transfer pricing of intangible assets cross-border subsidiaries of Multinational Corporation, state and local property tax related to exempt intangible assets etc.
  • Intangibles are also used for financing collateralization and securitization Primarily cash flow-based intangible assets are used as a collateral for corporate financing and are also used for lease back or license back financing.
  • Intellectual property royalty rate analysis in infringement claims, breach of contract or non-compete agreement damages claims and or seizure, impounding or other tort claims are some of the examples that require litigation and dispute relatedvaluation of intangible assets.Custodial inventory of both owned and licensed intangible assets, assessment of insurance coverage on intangible assets, defense against infringement, torts, breach of contract, and other corporate allegations require valuation for corporate governance and regulatory compliance.
  • Intellectual property joint venture, joint development and or joint commercialization agreements require to account and value for management Information and strategic planning

Intangible assets are identified in almost all the industries in various forms, like:

  • Player contracts, stadium lease, sponsorship agreements, luxury suits agreements, coach and management agreements in sports industry.
  • Copyrights, patents, critical employees, and research and development are key intangible assets identified in the computer companies and technology industry.
  • Intangible assets such as publishing rights and essential talent personnel are of significant value in the entertainment and media sector.
  • Patents of formulas and recipes and brand name recognition are well recognized in the highly competitive consumer products and services industry.
  • The healthcare industrygenerally have a high proportion of investment in intangible assets like brand names, valuable employees, and research and development of medicines and methods of care.
  • Patented technologies and brand names are pertinent within the automobile industry or transportation sector.

It’s evident that recognizing, accounting and valuation of intangible assets is the essence in modern business world. With the growing investment and recognition of intangible assets there is an implied need of industry experts, valuation specialists and data providers to capture the fair and reliable estimate of investment in intangible assets. 

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