How can you report on intangible assets like intellectual property, human capital, and brand reputation?

While intangibles are remarkable in many ways, there is no common understanding of their nature. Their different definitions do not correspond to each other and do not create a complete picture: ? “Intangible assets are something valuable that a company has that is not material, such as a brand name.” (Cambridge Dictionary). ? “Intangible assets are assets that do not have a physical or financial embodiment.” (The OECD). ? “Intangible assets are defined as identifiable non-monetary asset[s] without physical substance.”(IASB). ? “An intangible asset is anything that's not physical or financial but is expected to provide a benefit over time.” (J. Haskel and S. Westlake, authors of “Capitalism without Capital”).

Intangible assets are valuable resources that lack physical substance. They include intellectual property (such as patents, trademarks, and copyrights), brand reputation, human capital (employee skills and knowledge), customer relationships, and proprietary software. Unlike tangible assets (like machinery or buildings), intangibles cannot be touched but contribute significantly to a company’s value.

Two characteristics of intangibles distinguish them from tangible assets: scalability and synergies. When an enterprise develops an intangible resource, somebody can use it in different locations or applications without additional costs. This feature gives startups an advantage for exponential growth. Due to the absence of physical form, intangibles can quickly move globally, and geographic boundaries are open to their business applications. Intangibles are "synergistic": a set of smartly combined assets can create a foundation for a synergetic effect. However, a combination of assets is undividable, and some of them can only work with others to perform business tasks (like software and hardware).

Intangible assets play a crucial role in modern business. Here’s why: * Competitive Advantage: Brands, patents, and unique know-how give companies a competitive edge. * Revenue Generation: Intellectual property can lead to licensing deals, royalties, and increased sales. * Long-Term Value: Intangibles often appreciate over time, contributing to a firm’s long-term success.

There is no standard method to value intangibles, while three common methods are generally accepted. The first method values intangibles according to replacement or reproduction costs. However, investors expect a significant increase in value compared to initial costs. The second commonly used valuation method for intangibles compares similar intangibles sold in the market, employing different multiples. Unfortunately, there is no input data for calculations because there are no markets to trade intangibles. The third valuation method tries to estimate intangibles' contributions to startup profitability via profit differentials. It shows an alternative way to evaluate intangibles via plausible proxies (using related quantifiable factors).

Measuring intangibles is challenging due to their intangible nature. However, some approaches include: - Market Valuation: Assessing brand value through market comparables. - Cost Approach: Estimating the cost to recreate an asset. - Income Approach: Projecting future cash flows related to intangibles.

Reporting intangibles has become a nightmare for several reasons: ? No physical nature: Intangibles are not material. When embedded in physical media, their value is independent of physical representation. ? Non-rivalrous: Many users can use the same intangibles simultaneously. Moreover, software copies are free of charge. ? Partially excludable: Some intangibles in digital form are easy to copy and difficult to protect. As a result, rivals can use weak property rights protection to their advantage. ? Non-tradable: Some intangibles created for particular purposes inside enterprises have no other applications and are untradable on the market. ? Non-separable: The value of many intangibles is inseparable from people.

Reporting intangibles involves transparency and disclosure. Unfortunately, accounting standards (such as IFRS and US GAAP) limit the recognition of internally generated intangibles. Acquired intangibles appear on balance sheets, but internally generated ones often remain undisclosed. Brands like Smirnoff and Baileys exemplify this discrepancy. To improve reporting: 1- Annual Assessment: Management should identify and value key intangibles. 2- Notes in Annual Reports: Disclose opinions on intangibles to enhance transparency.

Historically, intangible assets emerged from scientific works and accounting conventions around two decades ago. Nevertheless, today, there are still three common forms of ignorance in this aspect: ? Entrepreneurs ignore the existence of intangibles since they are not in the accounting ledgers (Let’s call it “Accounting Blindness”). ? Management recognizes and tries to manage them using methods and tools developed for material assets (“Management Myopia”?). ? Lawyers focus on protection matters similarly to tangible assets (This is typical “IP Protection Phobia”). Total ignorance of intangibles can result in 90% of lost business opportunities. #PROFITomix

International accounting conventions refined the old accounting perspective of capitalization to end the confusion about intangible capital structure. They prescribed the three-component structure of intangible capital generally accepted today: ? Software & Computerised Information. ? Innovative Property. ? Economic Competencies. Computerized information includes application software, databases, and algorithms developed inside enterprises or bought from a third party. Innovative property includes patents, trademarks, patterns, copyright licenses, etc. Economic competency includes all marketing-related intangible resources, business model innovations, education and training initiatives, business processes, and organizational structures.

--> Advocacy: Support initiatives for greater disclosure of internally generated intangibles. --> Management Awareness: Encourage regular assessments of intangible assets. --> Transparency: Share insights in annual reports to bridge the information gap.

Spillovers mean enterprises can benefit from intangibles they have yet to develop. In other words, different market players can capture the value of some assets created within a startup (for instance, ideas and software components). However, one must bear in mind that spillovers can be viewed positively from the position of those who can take advantage of others' assets. Thus, spillovers derive challenges and advantages at the same time.