Fitting the Intangible Pieces Together: a Call to Arms
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Slip of the tongue Fitting the intangible pieces together: a call to arms most do not understand intangibles. This is If intangibles are ever to achieve the a problem because knowledge intangibles prominence they should in business, are the key to the future of our firms, our a common language that describes communities and our national economies, what they are and how they are as well as the general one. Each kind of intangibles specialist has something to deployed needs to be developed bring to the table. But we must all come together and create a holistic view that By Mary Adams and Michael Oleksak makes sense of the confusing picture facing businesspeople when they try to figure out If you are reading this magazine, then at one what we are talking about. time or another your interest in intangibles This article describes the perspective of will have put you in the following situation. five of the principal kinds of professional that You are at a business event and make a new influence how intangibles are understood acquaintance. The two of you start chatting today: accountants, lawyers, investors, risk about intangibles. The other person tells managers and business managers. Each you enthusiastically that, yes, they work perspective is examined individually and then with intangibles too. But within a few a suggestion is outlined of how to pull them minutes, you realise that they have a all together. The goal is to develop a holistic completely different perspective. They don’t view of intangibles management that can see the field in the same way that you do. show a mainstream businessperson how to You have completely different philosophies. manage the growing intangible side of their You don’t share a common definition of business and take advantage of the expertise even the simplest terms (starting with the of each of these professions. IAFS very word “intangible”). You walk away This article is sponsored by the Intangible unsure of whether you will ever speak the How intangibles are seen today Asset Finance Society’s Member News same language. We live at the intersection of the industrial Committee. The objectives of the Society Put yourself in the shoes of the average and knowledge economies. Yet most of our (www.iafinance.org) are to increase the businessperson. It’s the same for them. ideas about business and management are visibility, transparency, and value of Every time someone talks to them about legacies of the industrial era. This is intangible assets through education, intangibles, they get completely different especially evident when you look at the advocacy and the promulgation of information. The definitions, the details different views of intangibles held by each of standards. The Member News Committee and the vocabulary vary. The priorities the featured perspectives featured in Table 1. spearheads the Society’s education efforts appear different, almost contradictory. It’s None of the professions described in this through the Mission:Intangible Monthly no wonder that most businesspeople ignore article sees its jobs as intangibles Briefings, a conference call on the first Friday the trend of the booming importance of management. Intangibles have just crept into of each month featuring a moderated intangibles that we in the field see with the job description thanks to the shift from conversation with two or more authorities. such great clarity. Each of us is providing the industrial to the knowledge era. Table 1 IAM magazine, a Globe White Page Ltd just a piece of the puzzle. Very few of us are makes clear that each of these perspectives is publication, is the media partner of the trying to fit these pieces together. a consequence of the job that the respective Society. In each issue, IAM magazine This problem of vocabulary and professional has to do. Accountants focus on publishes a contribution from the Society on perspective ends up hurting your business intangible assets because that is what they a noteworthy intangible asset finance matter. and your clients’ businesses. Clients don’t are equipped to identify. Lawyers focus on buy things that they don’t understand. And intellectual property because they are experts www.iam-magazine.com Intellectual Asset Management November/December 2010 63 Slip of the tongue Table 1. Differing perspectives on intangibles Accountant Lawyer Investor Risk manager Manager Core concern How to represent How to comply with How to make How to identify How to leverage the performance the law and use it to money trading and mitigate risk all resources for the greatest and capacity of protect and leverage this stock profits and long-term value the firm assets and/or relationships Systemic view Financial statements Document/contract log Financial Enterprise risk Financial statements, statements + management multiplicity of information management sources on individual discussion intangibles Intangibles Only deal with intangibles Tend to think of Primary focus is Focus generally With the exception of the perspective when they are part of a intellectual property as financial and on individual risks, occasional balanced financial transaction. dominant intangible. intellectual capital although reputational scorecards or intellectual Must conform with Actually involved in all is seen as a risk helping to move capital report, most standards (GAAP, three intangibles non-financial focus towards more businesses do not focus on FASB, IASB) categories asset holistic view of intangibles as a separate intangibles asset class or management challenge Favourite “Intangible value can “If you can’t protect it “We have “To zero in on “That’s interesting but what comment disappear in a minute” legally, it’s not worth proprietary ways intangible risks, does it have to do with my anything” of analysing we ask our clients business?” companies” what keeps them up at night” in the laws that create this special class of limiting their definition to those assets that intangibles. Investors don’t really focus on can be capitalised following a financial intangibles, except as intellectual capital transaction. Of course, the great majority of – an undefined, non-financial element of intangibles are not acquired from outside value and competitive advantage. Risk the organisation, but are rather built managers focus on specific intangible risks internally. These are not capitalised. The and sometimes on corporate reputation. net effect of this approach is the huge gap Business managers focus on intangibles as that exists today between the total value of part of their job, but lack a clear vision of the a corporation and the book value on its importance of intangibles to their success. balance sheet. Today, the balance sheet The end result of these differing explains only 20% of the value of the perspectives is five completely different average company on the S&P 500. The inventories of corporate intangibles, as the remaining 80% is off balance sheet, following discussions bear out. intangible and poorly understood by most accountants. Our favourite comment by an Accountants accountant is that intangible value is Accountants are charged with measuring ephemeral and can “disappear in a minute”. the financial performance and capacity of a The contrast between the intangibles firm. Their models and standards generally recognised in the normal course of business do not recognise investments in intangibles and in a third-party transaction is very clear as capital spending, meaning that most in Table 2. Here you see that accountants investments in intangibles are expensed in recognise almost no internally developed the year in which they are made. This has intangibles. But they do allow for many kinds two consequences: it lowers current of intangibles acquired in a third-party earnings and it fails to create a record of the transaction to be eligible for capitalisation on accumulated investment in intangibles. the balance sheet. This table summarises this The only exception to this rule is when broad array of intangibles. These extensive intangibles are acquired in a third-party lists and the accounting profession’s transaction, such as an asset purchase or a documentation of how to identify and treat corporate acquisition. When accountants everything from assembled workforce to talk about intangible assets, they are backlog and technology constitute a 64 Intellectual Asset Management November/December 2010 www.iam-magazine.com Slip of the tongue Table 2. The accountant’s perspective Accountant Recognised intangibles Human capital Internally generated: • None Acquired: • Assembled workforce • Non-compete agreements Relationship capital Internally generated: • None Acquired: • Customer lists • Trademarks and brands • Contracted revenues • Backlog • Off-market agreements • Government licences and rights • Goodwill* Structural capital Internally generated: • IFRS allows capitalisation of some R&D Acquired: • Technology • Patents • Software • Databases • Catalogues of works/copyrights • Domain names Fudge factor * Goodwill (excess of purchase price over acquired tangible and intangible assets) wonderful primer on the variety of knowledge infrastructure, no one is sure how all this assets held by today’s companies. breaks down. At the time of an acquisition, But even though accountants are open to only the obvious assets get valued and capitalising a diverse array of investments, in capitalised. Until accountants can provide a practice very few intangibles end up being more accurate description of the intangible identified and booked in the average merger. infrastructure developed within companies, In Ernst & Young’s Acquisition Accounting: the intangible information gap will continue What’s Next for You?, data was summarised to plague businesses every day, not only for 700-plus acquisitions around the world when they undertake an acquisition. in 2007. Overall, an average of 30% of the purchase price for an acquisition was booked Lawyers to tangible assets, with 23% booked to Lawyers are charged with helping specific intangibles and a whopping 47% corporations to comply with the law and booked to goodwill. use the legal system to protect and leverage Does this mean that half of the value of corporate assets.