Placing a value on intangible assets

Nearly two decades ago, one of HR’s key messages was that human capital was the most valuable asset that doesn’t appear on the balance sheet. Yes, we all know what our paybill comes to each month, but this in no way represents the value that people bring to the business each day in terms of their expertise, skills, knowledge and experience.

The notion has been discussed at length within the profession and at conferences, seminars and workshops but what progress has been made since then? Anecdotally, we still hear of HR directors that struggle to secure investment from the board for human capital initiatives because they can’t demonstrate a return on investment.

But human capital isn’t the only intangible asset whose true value needs to be more readily recognised at executive level. The importance of culture, equally difficult to quantify, is also entering the debate. The Financial Reporting Council (FRC) published a report in 2016 that called for company boards to recognise the wider importance of corporate culture. Sir Winfried Bischoff, chairman of the FRC, underlined how a healthy corporate culture can lead to long-term success by protecting and generating value in the UK economy.

In a separate study, professional services firm EY suggested that some four-fifths of a company’s value is now intangible and called for leaders to calculate it. “There is a demand for quantified assessment and tangible measurements around culture rather than bland statements,” says John Davies, executive director within the assurance team at EY writing in Criticaleye, the peer to peer board community.

While these are all welcome calls to action, until now there has been no great compulsion for organisations to closely examine their intangible assets. Brand Finance, an independent valuation and strategy consultancy, is among those calling for a new approach to financial reporting, however, which just might provide the necessary impetus to place these areas under the spotlight.

In the consultancy’s Global Intangible Finance Tracker (GIFT) 2016 report, it stated that it supports the demand that boards should be required to disclose their opinion of the Fair Value of the underlying values of “all key intangible assets” under their control.

Such assets are grouped into three categories: ‘rights’, which includes: leases, distribution agreements, employment contracts, covenants, financing arrangements and supply contracts; ‘relationships’ such as the trained and assembled workforce, customer and distribution relationships; and ‘intellectual property’ which includes patents, copyrights, trademarks, proprietary technology (formulas, recipes, specifications, formulations, training programmes, marketing strategies, artistic techniques, customer lists, demographic studies, product test results); and business knowledge such as suppliers’ lead times, cost and pricing data, trade secrets and know-how.

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In Brand Finance’s view, a commitment to undertake an annual revaluation of all company assets, including tangible assets, acquired intangibles in previous years and internally generated intangibles would be “a boon” for boards, accountants, investors and analysts. It explains that the transparency and clarity this would bring enables boards to make more effective use of their assets, accountants would have a truer picture of asset values and investors and analysts to more accurately price shares.

A survey undertaken as part of the GIFT report, produced in association with the Chartered Institute of Management Accountants (CIMA) and the Institute of Practitioners in Advertising (IPA), found that two-thirds (68 per cent) of analysts and three-fifths (58 per cent) of chief financial officers thought all intangibles should be revalued each year.

This drive for change is coming from those who want to see fair reporting and greater transparency, but it may have a happy knock-on effect for those organisations trying to expose the true value of assets such as human capital and corporate culture to make improvements in areas such as productivity and performance. Put brutally, these people speak the language of business and money and boards are more likely to listen to them.

In response to the call, Tony Manwaring, executive director of external affairs at CIMA, reckons that leaders need an understanding of all factors “material to their business” and this means fully recognising the value of intangibles such as “reputation, brand and relationships”. “After all, you wouldn’t want to be in a plane where the pilot was ignoring half the instruments,” he says.

Similarly, no leader should want to be at the helm of an organisation only half knowing what makes up its true value.


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