Intangible Assets

Description of Intangible Assets. Explanation.

Definition Intangible Assets. Description.

Intangible Assets are non-physical assets. Common examples of intangible assets include brands, reputation, copyrights, patents, trademarks, trade secrets, know-how, goodwill. In accounting, intangibles are considered Non-current Assets.

Intangibles, intangible assets, knowledge assets and intellectual capital are more or less synonyms. All are widely used – intangibles specifically in the accounting literature, knowledge assets by economists and intellectual capital predominantly in the management literature.

According to Baruch Lev there are three main “nexuses” of sources of intangibles (often a particular intangible asset is created by a combination of these sources):

Discovery (innovation).
Organizational practices.
Human resources.

Intangibles have special characteristics:

Upside, value-increasing characteristics:
- Intangible assets are non-scarce. Deployment of an intangible asset is possible at the same time in multiple uses.
- Intangibles increase in value when used. This is also referred to as scalability: intangibles value increases when the scale in which they are used increases. Intangibles are not subject to diminishing returns as are tangible assets, but have increasing returns.
- Intangibles have strong network effects. Although not exclusively applicable to intangibles, network effects are characteristic for intangibles in the sense that intangibles often form the core of important networks.
- Intangibles create future value. All intangibles are future-oriented. (Because of this they are traditionally ignored by traditional accounting systems – conservatism concept, materiality concept).
Downside, value-decreasing characteristics:
- Intangibles are difficult to manage and to exclusively control.
  - Taking full advantage of the tacit knowledge residing in employees is more difficult than exploiting the value of a building or a machine to it’s maximum.
  - Copying or re-engineering of intellectual assets is often relatively easy.
  - Limited ability to protect by property rights.
  - Cost accounting systems are not well geared towards intangible assets and are even wholly inaccurate for managing intangible assets-intensive corporations.
- Intangibles cannot be owned (except legal property rights).
- Intangibles investments are typically more risky. Due to the fact that intangibles play the most dominant role in early stages of the innovation process. Proper management can deal with this – i.e. R&D alliances, diversified innovation project portfolios.
- Intangible assets are nonphysical and therefore inherently difficult to trade.
  - Legal protection is weak.
  - Large sunk costs, low marginal costs.
  - Open exchanges for intangibles are in their infancy.
- Intangibles cannot directly be measured.
- Valuing intangibles is difficult.
- Intangibles are not evidenced by financial transactions (as tangibles are).

Importance of Intangibles

Intangible assets or intellectual assets are particularly relevant for the Economy as a whole, Organizations, Strategy, Finance, and Accounting.

Intangibles have been around since the dawn of civilization. Due to certain factors, including increased competition (globalization, deregulation) and the advent of information technology (notably the internet), corporations and the basis of competition amongst them has changed. This combination of factors catapulted the relative significance of intangible assets in the eighties and nineties of the 20th century compared to their tangible peers. Intangibles are now the major value drivers of businesses in our modern economy.

In 1978, 5% of all assets were intangible.
In 1998, 72% of all assets were intangible.
Currently, 75-85% of all assets are intangible.

Intangible Assets Forum (3)

Underestimating Intangible Values during Cost Cutting
"Intangible value is hard to measure. So often it is not measured. False conclusion: no measured value = no value.
I observe the following pattern:
- The primary method to increase profitability is reduce costs.
- Experienced experts are expensive. In my area the "products" created by them are intangible (e.g. competence).
- The value of intangibles is not measured in the same units as the costs (€). So managers cannot do an easy cost/benefit calculation.
- Astonishingly this leads to the assumption, that intangibles have little monetary value.
Typically experienced (= long time) experts build an extensive network. Part of their effectiveness is caused by their networks support in a) quickly getting expert consultation, b) quickly reach a agreement + decision due to mutual trust and understanding c) quickly getting small things done as personal favors (give and take!)
It is a common habit now to replace these experts with low cost resources.
And then the management is surprised, that profit does not increase, despite reduced costs."

FiMIAM : Financial Method of Intangible Assets Measurement
"In order to overcome the weaknesses of Sveiby's Intangible Assets Monitor and other intangible assets measurements, Rodov and Leliaert have presented their Financial Method of Intangible Assets Measurement (FiMIAM) . FiMIAM links intellectual capital to the market value of companies.
The authors developed 6 steps to do this:
1. Derive the value of realized intellectual capital. This value is defined as the difference between the book- and market value of a company, adjusted by market fluctuations that are a result of investors sentiment.
2. Select the most important components of intellectual capital. These components will then be categorized into:
• Human capital
• Structural capital
• Customer capital.
3. Measure the weight of each component of intellectual capital; giving these components coefficients according to their weight.
4. Justify the weights of each component.
5. Measure the monetary value of each component.This is done by multiplying the coefficients given to each component by its realized intellectual capital value.
6. Add the intellectual capital components to the companies’ book value.
In short, he FiMIAM enables firms to find monetary values of intellectual capital; thereby it enables firms to establish balance sheets that reflect both tangible and intangible assets.
Source: Rodov, I and Philippe Leliaert (2002), “FiMIAM: Financial Method of Intangible Assets Measurement”, Journal of Intellectual Capital. Vol. 3 Issue: 3."

Intangible Assets and Growth of Companies
"How are intangible assets important for competitive growth and sustainable growth? Open to reactions..."

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