Intangibles made easy
Intangibles made easy Making the intangible, tangible

Value

This sounds like a simple question – what is value?  Value is a single representation of the future benefits, of a 'thing', to the owner.  A thing has value when it is ‘of worth’ to someone, which means it has utility and related benefits.  Utility is the satisfaction that an owner has when using a thing.  If the things utility is desired by someone else other than the orginal creator then the thing is in demand and can be redefined as an asset.  The value of any given asset is therefore directly related to the budgets of all potential future owners that presently exist or may exist in the future i.e. the market demand for these things.

Intangibles

If you can’t physically touch it, mentally understand it or precisely measure it then it’s intangible.  Tacit knowledge resides in people's heads.  An intangible asset must be owned or of worth to someone and until an intangible thing is codified (made explicit or tangible) it cannot be owned by anyone other than the original creator - because it's in their brain!  If this tacit knowledge is codified then the intangible thing can be owned by someone other than the originator such as a third party.  At this point the intangible thing can be termed an intangible asset and ownership can be transferred from the original creator.  An intangible asset is therefore a codified, intangible thing that has both inherent utility and a market demand for it - someone else wants to own it.  If a company owns an intangible it must be 'identifiable' and 'separable' from other business assets before it can be described as an asset and ownership can be transferred to a third party.

Here's a very simple definition of an intangible asset in a business context:

‘All the components of a firm that are codified and exist separately from monetary and tangible assets - tacit elements belong to individuals.’

 There are several classes of intangibles such as:

  1. Rights – usually codified in a firms contracts
  2. Undefined intangibles
    • Goodwill
    • Relationships
    • Going concern value
  3. Intellectual Property
  4. Structural capital – assets owned by a firm that support employees to create, codify and commercialise their tacit knowledge

Intellectual Property

Intellectual Property is a sub-category of intangible assets.  Intellectual Property and their associated economic rights are widely understood and there are some excellent texts and information sources such as WIPO that can explain the various categories such as Patents, Trademarks, Copyrights and Designs etcetera.

Intangible Valuation

The US subprime mortgage industry triggered a global economic crisis in 2008.  The re-packaging of sub-prime debts by banks and trading-houses into attractive investments were bought by banks, traders and hedge-funds.  Both buyers and sellers were unable to accurately asses the value of these assets and they turned out to be near valueless.  As the world moves towards a knowledge based economy the understanding of all intangible assets and their inherent values will be very important in order to avert another global credit crisis.  It’s clear that if we are to analyse quality and appraise value we should fundamentaly understand intangibles and be able to separate them from tangibles.

Intangibles are neither a good (product) or a service but do have high credence attributes (cannot be experienced until after purchase, if at all unless something goes wrong).  Customers will often try to determine quality and utility (usefulness) by reputation which is often determined by price or brand – which in itself is misleading.  The most important element in intangible asset valuation is being able to identify the intangible asset and separate this from the tangibles.  By ensuring complete separation, it is more likely that the 'intangible' will be valued accurately.