Michael D. Moberly January 2, 2013
An often overlooked or dismissed requisite to acquiring a complete picture of a company’s financial health is recognizing the intangible assets a company produces, possesses, and their contributory value. As readers know, balance sheets are financial reports, steeped in tradition as being (perceived) as the primary, sometimes sole, descriptors of ‘the health’ of a business or company in terms of constituting a quick sound bite of the value of its (a.) assets, and (b.) liabilities, along with describing equity positions of owners or stockholders.
As an intangible asset advocate and strategist though, seldom do I become engaged in a discussion about the propriety or usefulness of disclosing – reporting intangibles on balance sheets or financial statements, that it’s not necessary, at some point, to respectfully introduce a challenger to three irreversible economic facts and business realities…
- intangible assets are just that, they’re intangible, i.e., non-physical. Translated, this means intangibles are not necessarily subject to the five (physiological) senses of touch, smell, hearing, sight, or taste as tangible (physical) assets are, but, nevertheless are relevant and valuable properties and assets which take many forms, i.e., reputation, competitive advantages, intellectual property, brand, etc., for which there is no argument, nonetheless…
- a growing percentage of businesses, regardless of size or sector function – operate in a knowledge (intangible asset) based global economy in which, at minimum, 65+% of their value, sources of revenue, and ‘building blocks’ underpinning their growth, sustainability, and profitability evolve directly from intangible assets. This represents an acknowledgment that…
- examining a company’s balance sheets and/or financial statements alone, particularly those that do not address (report) intangible assets, do not convey a sufficiently deep or comprehensive picture of a company’s real financial health which are critical components/factors to making sustainably lucrative (business) decisions!
Businesses/companies own different types of property or assets, a lesser portion of which are physical-tangible in nature, while a growing percentage are intangible – non-physical, the latter being seldom, if ever, distinguished by category and reported as such. The reasons are numerous, with most rooted in accounting methodologies and regulatory agency rules.
Interestingly, Craig Woodman a writer for eHow, points out that, in practice, a balance sheet is usually presented in a list format, with assets at the top, then liabilities, followed by owners’ equity.
Conventionally speaking, Woodman reports, accounting rules stipulate that assets be differentiated into classes or categories, i.e.,
- current assets are business assets that are the most liquid which means they can be reasonably and readily converted to cash in a relatively short amount of time, typically within one year. Examples of current assets are cash of course and accounts receivable, both of which are assets that fund the day-to-day operations of a business.
- fixed assets, on the other hand, are such things as real estate or equipment. In other words, they’re physical or tangible assets and are typically less liquid, i.e., take longer to convert to cash.
- interestingly, Woodman does not place intangible assets into a separate category, and instead, considers them to be fixed assets, because, Woodman claims, like ‘current assets’ they are more difficult to covert to cash.
To Woodman’s credit, and I agree fully, any member of a management team, c-suite, or board who genuinely wants to determine/assess the ‘real’ health and/or condition of a business or company, absolutely must identify, unravel, and assess the contributory value of the intangible assets (the company) has developed, nurtured, produced, and possesses. But, here is where I disagree with Woodman, it does not have to be that difficult to establish/determine the value of intangible assets, providing one understands and can unravel their ‘contributory value’, and conclude intangibles do not routinely constitute an inaccurate or inflated valuation.
But, in business transaction circumstances in which my counsel is requested, I consistently argue that decision makers, relative to their buy-don’t buy, invest-don’t invest decision, are obligated, in a fiduciary context, to do much more than merely ‘kick the tires’, which through my admittedly biased lens, translates as looking deeper and more comprehensively beyond balance sheets and financial statements to determine a company’s real (financial) health.
That’s why, if I was inclined to purchase a pre-owned or otherwise used automobile, my buy – don’t buy decision would be only partially based on the presence of a service/maintenance record that indicated the previous owner had the motor oil changed at prescribed intervals. A wiser buyer, in my view, should look for and investigate the countless ‘intangibles’ related to motor vehicle operation, care, and maintenance that can, and usually do, favorably or adversely impact a vehicle’s sustainability and reliability.
Again, intangible assets are ‘things’ which a business owns, but, of course, are neither tangible nor physical (property) as some still persist on framing them. Nevertheless, these assets have value, and should be investigated and assessed, or otherwise accounted for in any business transaction. In other words, intangible assets are, in one sense, comparable to the purchase of a pre-owned automobile, in which a buyer presumably calculates benefits will be realized because of the lower purchase price, but without a thorough and knowledgeable investigation may translate as frustration-based expensive repairs.
So, in my view, to purposely exclude intangible assets from a company’s – businesses’ net worth calculations, will not provide prospective investors or buyers with a ‘real or complete’ picture of a (a.) company’s value, (b.) it’s status among sector competitors, and equally important, (c.) its ‘internal building blocks’ to achieve and sustain competitive advantages, sustainability, profitability, and foundations for future wealth creation, etc.
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