The Rea

lvalue

of

Intangibles

Intellectual Property

PatentsTrademarks/Trade

NamesCopyrights

Trade Secrets

Intellectual Assets

Know-howContracts

Permits and Licenses Non Compete Agreements

Intellectual Capital

Human CapitalCustomer Capital

Organizational Capital

Distributor CapitalSupplier Capital

Intangible Assets

Value of a company = Intangible Assets + Tangible Assets

Value Intangibles

THE IMPORTANCE OF VALUATION

A major contributor to corporate worth

Value of alliances, network, human capital and leadership greater than $1 trillion for USA(2001)

Exclusion causes underestimation of the corporate worth

Impact on investor decision making

Necessary for creation of open, fair and efficient markets

Intangible Asset – Customer Relationships

In March 2005, bought for £1.113bn. £260m was assigned to the brands RAC and BSM

and a 'market' value of £132m was put on contractual customer relationships.

I wish I had worked out the

value of intangibles as

well…

Market Overvalues – Wastage of Capital

Market Undervalues – This Burdens firms with an excessively high cost of capital

VALUATION & MISPRICING

Company Estimated Intangible Capital (in $ billions)

Ratio of Market Value to Comprehensive Value

General Electric 324 0.79

Pfizer 200 1.29

Exxon Mobil 164 1.04

Altria Group 143 0.55

IBM 134 0.93

Merck 124 0.99

Microsoft 123 1.59

Verizon 105 0.8

Intel 95 1.09

SBC Communication 62 0.9

By Calculating a company’s “comprehensive value”, which takes into account its intangible assets as well as its physical and financial assets, you can assess whether the

enterprise is overvalued or undervalued by investors.

Source: Harvard Business Review

Undervalued or Overvalued

0

2

4

6

8

10

12

14

16

18

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

Retu

rns %

Months After Portfolio Formation

Future Risk-Adjusted Stock Reurns to R&D Capital-Intensive Companies

Sourc

e:

Harv

ard

Bu

sin

ess

Revie

w

Delayed Market Reaction to an R&D Investment

Shift from “R” to “D”

Misallocation of resources – a consequence of Undervaluation

…my teacher warned me, never to under-estimate the REAL value of intangibles…

“The Soft Assets – a hard Competitive Advantage”

Impact of Correct Valuation

Source: Harvard Business Review

EXPLOITABLE HUMAN CAPITAL

Determine which part of the business to audit.

Create the content of the audit

Gather data from multiple groups on current and desired

a) 90-degree assessmentb) 360-degree assessmentc) 720-degree assessment

Synthesize the data to identify the most critical capabilities

Put together an action plan

Identifying the Capabilities

Companies are reluctant to disclose competitive disadvantage

Issues with identification of the valuableintangibles

Shareholder liability issues

Managers may misuse information

Forgoing innovation and risk reduction by focusing more on the productivity of the intangibles

Issues with Reporting Intangibles

A lot of value creation is not translated into financial terms

Inability to identify which asset to value - what is the source of value creation?

Inconsistency in valuation by different organizations

Fear of giving away proprietary information

Issues with Reporting Intangibles

Absence of effective accounting of intangibles

Conventionally, intangibles reported on balance sheet only in course of an acquisition as ‘Goodwill’

Until 2001, GAAP required firm to amortize goodwill as expense

FASB stopped requiring companies to amortize Goodwill as expense

In 2003, SEC established new guidance for MB&A statements which address the disclosure of non financial performance measures

FASB and AICPA developed lists for intangibles but lists barely resembles

Traditional Recording Methods

Based on traditional methods, goodwill appears only upon acquisition.

No clear definition – When is technology an expense and when a capability?

Irrationality of amortization – Some assets have an indefinite useful life.

Exclusion of intangible assets developed internally

Inconsistency in reporting Standards

Issues with Traditional & Existing Reporting and Valuation Methods

Transparent process and assumptions

Clear definition of intangible asset

Quantifying the value of the intangible asset

Effective Valuation tool

Addressing intangibles in internal strategy and communication with shareholders

Reporting of intangible ratings in annual reports

Distribution of white papers & measurement tools by ministries in Japan

Treatment of R&D as an investment and not an expense by BEA

R&D satellite accounts by BEA to supplement GDP accounts

Danish IC Statements

Recent Developments

Government Initiatives in collaboration with stakeholders and interested parties - executives, banks and statisticians

The role of macro-economists

Accounting bodies should make it mandatory for companies to disclose meaningful information regarding intangibles assets.

Companies should voluntarily go for disclosure.

Appropriate Measures

• Using Intangible assets as a collateral !!!!

Burn Stewart Distillers refinanced with KBC Business Capital$31million Package was linked to the values of brands, accounts receivables etc.

NEW TRENDS….

Understanding the Value of Intangible Assets

Any Questions???

Thank you!