What Are Intangible Assets?
Today, intangible assets drive 85% of enterprise value for companies in the S&P 500
Today, intangible assets such as data, brands, content, code, trade secrets and industrial know-how, internet assets, design rights, regulatory approvals and standards compliance and plant variety rights are the primary drivers of competitive edge and company financial performance.
Intangible assets are everywhere.
Research has consistently shown that companies that focus on intangible assets consistently outperform their peers and industry benchmarks.
Problem 1: Hidden Value
Unfortunately, modern accounting standards completely obscure the impact of intangible assets.
Intangible assets are typically either:
off the balance sheet entirely
lost under “good will” or
listed at cost (there is no correlation between the cost and the actual value of an intangible asset)
The result? While most companies have a fixed asset register and can track desks, chairs and company cars, few companies can identify, assess the value or manage the risk and opportunities around their far more valuable intangible assets.
The impact of intangible assets is also distorted at a Profit and Loss (P&L) level. A simple example from Baruch Lev, Professor of Accounting and Finance at New York University’s Stern School of Business, illustrates just one facet of the problem.
Off balance sheet and obscured within the Profit and Loss, these distortions lead to a key problem that Peter Drucker succinctly summarised as “what cannot be measured, cannot be managed.”
In short, according to Professor Lev, current accounting rules are “19th century accounting”, designed for an industrial-age economy. They do not reflect the huge shift in value that has occurred over the last four decades.
Problem 2 - Hidden Risk
Today, with 90% of company value and virtually all earnings growth derived from intangible assets, then it follows that intangible assets are also now a critical source of company risk.
However, in more than 2,000 client engagements, we have only seen intangible asset risk appear on a company, Board or Risk Committee Risk Register once. This is a major problem for management and the Board because these risks can directly impact company performance.
Working with global insurance provider Marsh we have identified the five primary intangible asset risks facing modern companies:
Companies and investors ignore these risks at their peril – the consequences of failing to identify and resolve these risks are frequently catastrophic.
Over the past decade, we have seen hundreds of companies suffer from four problems relating to their intangible assets.
Many senior management teams, Boards, capital providers and advisors do not understand:
What intangible assets the company owns
The extent and nature of the risks the company faces
The impact of intangible assets on the company’s financial performance
How to unlock the company’s intangible asset value.
Unresolved, this can lead to substantial strategic errors, poor financial performance, depressed investment returns, unacceptable risk exposure and in a significant number of cases, catastrophic failure.
However, correctly identified, valued and leveraged, intangible assets can dramatically enhance competitive edge, unleash company financial performance and materially boost investment returns.