Intangible Assets and Value Creation

In today's highly competitive business landscape, where technology is reshaping entire industries, intangible assets have become a driving force behind corporate value creation. According to Ocean Tomo (2021), the share of intangible assets in the market value of companies listed in the S&P 500 index has surged from a modest 17% in 1975 to over 90% in 2021. In the United States alone, these assets were valued at a staggering $20.5 trillion in 2020. This data underscores a profound shift in how companies generate value, with a greater emphasis on intellectual property, brand strength, and other non-physical assets that play pivotal roles in shaping competitive advantage.

Unlike tangible assets, which you can see and touch, intangible assets are not physical in nature. However, their strategic importance is undeniable. When managed effectively, they can yield a significant competitive edge, driving growth, innovation, and profitability. The challenge for companies lies in recognizing these assets, measuring them accurately, and leveraging them to their full potential.

Intangible assets come in various forms and can be classified in multiple ways. The most widely accepted classification adheres to the IAS 38 standard, which organizes them into five broad categories: market-related intangibles (such as brands, trademarks, and non-compete agreements), customer-related intangibles (customer lists, distribution channels), intellectual property (copyrights for books, theatrical works), contract-based intangibles (leases, franchises), and technology-based intangibles (patents, industrial secrets, software). These assets, though diverse, share common characteristics: they must be identifiable, non-physical, and subject to the company’s control, offering future economic benefits.

But what makes an intangible asset truly valuable? It’s not enough for an asset to be intangible; it must also be identifiable and capable of generating future benefits for the organization. This means it should be separable from the company, controlled by the company, and capable of being measured reliably—whether at cost or fair market value. It is this control and identifiability that allows companies to effectively harness intangible assets to drive sales growth, boost productivity, cut costs, or generate new revenue streams. A patented process, for example, might lead to lower production costs, while a strong brand can increase consumer loyalty and sales.

However, intangibles don’t generate value on their own. Their true impact on financial performance comes from how they are combined with other assets—whether physical or financial. A brand, for example, becomes most valuable when it is paired with an efficient production process or an effective distribution network. Likewise, software by itself doesn’t necessarily add value unless it is integrated with the company’s operations to enhance productivity or reduce errors. In other words, the value of intangibles is indirect, but when used strategically, it can be transformative.

To reflect an intangible asset's value on financial statements, certain criteria must be met. It must be identifiable, under the company’s control, and measurable with reasonable accuracy. For instance, the acquisition or development of a patented technology might be recorded on the balance sheet, reflecting the transaction's market value. This process of materializing intangible value is critical because it allows companies to convey their true worth to investors and stakeholders.

Not all intangible assets, however, make their way onto financial statements. Only those with a defined useful life—and recognized by tax law—are eligible. These include software, licenses, franchises, copyrights, patents, and other industrial property rights, as well as development-stage intangible assets like prototypes, designs, and models. In contrast, internally generated goodwill or brand reputation, while immensely valuable, often remains off the books, creating a gap between a company's market valuation and its balance sheet.

This brings us to a critical question: are companies fully aware of the value of their intangible assets? While there is growing recognition of their importance, many firms still struggle with accurately identifying, valuing, and managing these assets. The complexity of measuring the economic impact of a brand, a patent, or even a highly skilled workforce often leads companies to overlook significant opportunities to enhance value. This gap presents both a challenge and an opportunity. In an economy increasingly driven by knowledge, innovation, and intellectual property, those companies that master the art of managing their intangibles will be the ones that define the future.

In recent years, the surge of companies embracing digital transformation and intellectual property has only underscored the growing importance of intangible assets. Major tech companies, for instance, derive much of their value from software, data, and network effects, all of which are intangibles that don’t fit neatly into traditional accounting frameworks. As the business world continues to evolve, so too must the methods we use to evaluate and harness the power of intangibles. After all, the real question is not just about whether a company understands the value of its intangible assets, but whether it knows how to leverage them to create lasting value.