As we live right smack in the age of information technology, a greater proportion of companies are beginning to realise that the key to remaining competitive in this ever-changing market is to focus on intangible assets. Most of the value of a company has traditionally been attributed to tangible assets, but shifts in the market have seen how intangibles such as software, brand, and innovation drive sales and profit.
Within this context, it is worthwhile for companies to incorporate the valuation of intangible assets into their corporate strategy. A failure to recognise the commercial strength of your assets could potentially undermine a company’s competitive advantage or obscure opportunities for further development.
The Valuation of Intangible Assets
According to the ATO, intangible assets can be broadly categorised as
- identifiable intangible assets (excluding intellectual property and goodwill)
- intellectual property
A significant proportion of the market capitalisation of the ASX 200 is represented by the various IP assets held by those companies. The valuation of IP is often required for taxation, financial reporting and commercial negotiation purposes. Companies should identify their IP assets and determine their legal, functional, and economic characteristics. It allows their value to be formally recognised, and is beneficial to sales price and capital-raising.
Before developing value-maximising strategies, it’s important to first manage the intangible assets at risk, by:
- Assessing and quantifying the dollar value of your intangible assets – such as brand, content, technology.
- Identifying areas where your intangible assets are not legally protected, and to take action accordingly.
- Creating a system for tracking changes in the commercial value of your assets.
Identifying your IP assets
Quantifying the value of your assets through formal accounting reports will help your business when it’s time to sell. Potential buyers and investors will have access to this information and the value of your assets could be one of the factors that helps them in the decision.
There are several benefits to identifying your IP assets. Determining the value of your intangibles such as IP will allow you to formally recognise that value through financial reporting as well as set down a system to track how your assets change, and the risks they pose. It will also add to or provide a clearer picture of the overall value of your business. There might also be tax deductions applicable. For companies looking to sell their business – the valuation of IP could also reduce the net worth categorised as ‘goodwill’.
In the process of valuing your assets, also consider the products or services that are the centre of your corporate strategies – have you provided them with enough legal protection? Legal and financial due diligence are important to identify any potential liabilities and their likely impact on future earnings. In some cases knowing your legal rights when it comes to your assets could provide you with market advantages.
According to the ATO, other factors to be taken into account during the valuation of intangibles also include:
a description of the specific intangible asset or item of intellectual property […]
a description of the complementary assets used in generating value for the intangible asset or item of intellectual property, and the calculation of any value allocation or charge needed to account for the use of those assets
an analysis of the useful or effective life of the intangible asset or item of intellectual property
the legal rights associated with the intangible asset or item of intellectual property
evidence that the intangible asset or item of intellectual property derives incremental value (for instance, establishing proof of the value generated by the aesthetic elements of an industrial design versus the utilitarian nature embedded within the design)
expert reports, where relevant.
The valuation of IP and intangibles is often a complex process. While Australia adopts the International Financial Reporting Standards for reporting intangible assets, in practice there is a lack of consistency across businesses. Thus, before proceeding it’s important to consider the various approaches and methodologies that can be used – and apply what is most logical and strategic for your business.
What do I do now?
Contact us if you would like to have more information on your legal rights and due diligence obligations for intangible assets. Our lawyers at You Legal will be happy to assist you in whatever way we can.