This article was written by ipervescence in collaboration with Davies Collison Cave. ipervescence is a joint venture between its Managing Principals and QANTM Intellectual Property Limited
Intangible assets have dramatically risen in importance with the evolution of an increasingly competitive and digital economy. However, they have been largely ignored by accounting standards. To effectively leverage opportunities and mitigate risks associated with intangibles, businesses must understand their economic worth.
This article explains the importance of understanding the economic value of intangibles and how they can be robustly and reliably valued to drive business success.
Why do we need to value intangible assets?
Generally, intangibles are not recorded on the balance sheet until after a transaction has occurred. As a result, a substantial portion of enterprise value may not be evident on the face of a balance sheet. This creates a significant information gap for managers and boards. With intangibles accounting for more than half of the value of most organisations, it is important that their economic value is accurately drawn to the attention of decision makers, so they can be effectively leveraged, and associated risks mitigated.
When should intangibles be valued?
Ideally, businesses should regularly value their key intangible assets, to help inform strategic planning and transparent, informed decision making by directors and senior managers.
Understanding the economic worth of intangibles will be particularly important in the context of developing and implementing key enterprise objectives; commercialisation (e.g. licensing or selling intangible assets); investing in R&D; selling or buying a business; raising capital; litigation and insolvency.
A practical illustration of the importance of valuing intangibles in the insolvency context, is Nortel. Nortel filed for bankruptcy in 2009. Its physical assets sold for US$3.2 billion. Its patents were noted on the balance sheet as US$31 million, but in fact sold for a staggering US$4.5 billion.
How can intangibles be robustly valued?
Traditional valuation methods are not well suited to valuing intangible assets. However, there are recognised methodologies that will reliably and accurately determine the economic worth of intangibles. These include a qualitative as well as quantitative analysis. In other words, they involve a technical and legal assessment of the quality of the underlying intangible – for example the scope and drafting of a patent specification; the breadth of classes covered by a trade mark registration; the veracity of data; and the structure and maintainability of software code.
A valuation of intangibles should comply both with accounting standards1 and recognised international guidance for IP valuation2. Ideally, a valuation should be conducted by experts with credentials in the global finance and investment industry, as well as expertise in the relevant underlying assets, for example a registered patent or trade mark attorney.
Intangible assets make a significant contribution to corporate worth.
It is possible to reliably determine the economic worth of intangibles, using rigorous and robust analysis. Understanding the quantum of value of intangible assets can deliver significant benefits by informing business decisions to promote successful outcomes.
Do you understand the economic value of your business' key intangibles?
1. Such as GAAP and IFRS
2. These include the following:
- European Commission's Report from the Expert Group on IP Valuation (https://op.europa.eu/en/publication-detail/-/publication/797124c6-08cb-4ffb-a867-13dd8a129282)
- Royal Institute of Chartered Surveyors (RICS) Professional Guidance on the Valuation of IP Rights (https://www.rics.org/oceania/upholding-professional-standards/sector-standards/valuation/valuation-of-intellectual-property-rights/)
- International Standard ISO 10668 for Brand Valuation (https://www.iso.org/standard/46032.html)
Originally published 4 December 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.