They cannot be seen or touched but contribute significantly to the growth of nations and companies. What are they? To most, the answer is not that obvious, reminding us that intangible assets, although increasingly gaining importance, still do not receive the recognition they would deserve. But what are intangible assets and why are they important?
Contrary to tangible assets, intangible assets are not physical in nature and include assets such as goodwill, copyrights, brand and intellectual property. Such assets are typically long lived and can foster growth for the companies that own them, which does explain why companies have become increasingly interested in them. Let’s take a look at Apple, for example. The US tech giant has the highest brand value for 2019 according to Forbes, and its brand recognition is indisputable. Without its strong brand, Apple would not even be close to its phenomenal success. Brand is a key factor of sales and many purchases of Apple products and services simply happen because of brand the company built over the years. But besides sales, this intangible asset can also yield a multitude of other benefits to the company, from attracting talent from highly skilled labour pools to lowering the cost of borrowing through the popularity of the company’s stock shares. Similarly, other intangible assets such as copyrights can contribute to corporate success by creating opportunities for commercial exploitation of the company’s inventions and other intellectual property.
Even though companies are increasingly channelling their efforts to the exploitation of intangible assets, most of their value is not accounted and reported in balance sheets. Take Microsoft for example. The company has the most valuable intangible assets for 2019 according to BrandFinance with a value of $904bn overtaking Amazon in the intangible asset value race. However, only £44bn are reported in its balance sheet putting the company only at the 38th position in the disclosed intangible value list rankings. This discrepancy between reported and overall intangible value is an ongoing topic of research and there is no shortage of arguments in favour of a new modified financial reporting framework that accounts for such undisclosed value.
But it is not just the corporate world that takes intangible assets seriously. Governments across the globe have put forward agendas to identify, valuate, manage and exploit their intangible assets, acknowledging their significant implications not only for the measurement of the GDP but also for economic growth. The UK is a good example to look at, as it is among the first nations internationally to recognise the importance of its intangible assets and systematically engineer ways of exploiting them.
At Autumn Budget 2018, the Her Majesty's Treasury, in a joint initiative with the Cabinet Office, published a report on how the government can better exploit intellectual property and other intangibles in the public sector. I was quite fortunate to be part of the team that was purposely created to lead this work by developing a framework that enables the identification, valuation, management and exploitation of the UK’s public sector knowledge assets. We have considered a multitude of intangible assets such as organisational capital, R&D, software, cultural assets and human capital. Similar to the private sector, most of the value of intangible assets is undisclosed. Although knowledge and other intangible assets account for 2% of the UK’s total public sector assets, these are regarded to be significantly undervalued especially when such assets ‘account for between 52% and 84% of the value of publicly listed companies today’ (HM Treasury, 2018). The value of knowledge and other intangible assets reported in government accounts was just £34.5bn for 2018, but this amount can rise to more than £150bn according to a pan-European project led by a team of academics and other experts in the field. One of my roles in the team was to develop a valuation methodological framework while keeping the balance between academic rigour and practicality. The resulting estimates – due to be published in upcoming government publications – raised the value of public sector intangible assets considerably higher than the figure reported in government accounts.
Besides the UK, other nations including Denmark, Singapore and Japan – just to name a few – take intangible assets seriously. For example, Denmark has conducted considerable work on understanding the dynamics of intangible assets adopting a “qualitative” narrative perspective while Japan has developed structured policies at the corporate, city and regional level. It is not a coincidence that these economies are among the most innovative internationally and consistently in the top-20 of the Global Innovation Index.
Intangible assets, although key factors of corporate and national success, still do not receive the attention they deserve. An important step towards this would be to acknowledge their value by reporting their total value – which by large remains undisclosed today – in balance sheets and government accounts. To this end, initiatives from academics, government officials and valuation experts can pave the way towards a more “intangible landscape” but with very tangible benefits for all.
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