Intangible Assets’ Absence of Physicality

Michael D. Moberly    March 15, 2012

If a tree falls in a forest when no one is around, does it make a sound?  Similarly, if a company asset that happens to be intangible, something which 65+% of a company’s assets are, is stolen, misappropriated, or copied by a competitor or economic-competitive advantage adversary, will anyone in the company notice?  After all, intangibles lack a conventional sense of physicality, in other words, they’re not tangible!

Unfortunately, a question that remains on the lips of too many business decision makers, management teams, and boards today is how can intangible assets tangibly contribute to a company’s value, or create sources of revenue, and serve as ‘building blocks’ for growth and sustainability, i.e., reputation, brand, goodwill, and competitive advantages, etc.?

While we clearly know the answer to the first question above is yes, that is, falling trees do make a sound even if no one is around to hear it.  The answer to the second question, on the other hand, needs more clarity, i.e., applications, examples, etc.  My experience in the intangibles arena leads me to believe that the answer to the second question isn’t so much a matter of intangible assets’ lacking physicality, as it is that conventionally driven and ‘mba’ oriented companies give short shrift to identifying – explaining intangible assets.  This occurs for several reasons in my view, two of which are, intangible assets:

  • with few exceptions, are not reported on company balance sheets or financial statements
  • are more challenging and subjective insofar as valuation is concerned compared to physical-tangible assets

One thing that’s needed for sure, in my view, is a clear, concise, and industry-sector relevant definition of intangible assets that’s operational in nature and absent a purely accountancy or legal orientation.

While attending a summer conference at the National Academies several years ago titled, ‘Intangible Assets: Measuring and Enhancing Their Contribution to Corporate Value and Economic Growth’, one speaker euphemistically, and perhaps condescendingly, characterized the difference between tangible and intangible assets in the following manner, “if you can kick it, drop it, or stub your toe on it, it’s a tangible asset”.   Presumably, if one can do neither to an asset, it’s intangible.

That is hardly the kind of definition that creates broad confidence in the utilization – exploitation of intangibles.  Nor will it likely ‘pass an mba smell test’.  But, the economic fact remains, 65+% of most company’s value, sources of revenue, and building blocks for growth and sustainability today evolve directly from intangible assets!

Today, regardless of what products or services a company produces or, whether it’s a large multi-national or a small, medium size enterprise, it is increasingly likely that hard earned and valuable proprietary experiences and know how (intangible assets) underlie and are thoroughly embedded (applied, used) in that company’s products and/or services.

What’s often missing in this particular equation though, among business decision makers, management teams, and boards, is:

  • a clearer recognition-appreciation for the forms that value takes, i.e., recognizing the various formats intangibles exist and assessing their respective contributory value
  • the practicalities of how to extract value from and/or monetize the assets, and
  • best – appropriate practices to sustain (protect, preserve) control, use, ownership, and monitor value and materiality of a company’s intangibles throughout their value – functionality cycle.

Another consistent challenge remaining in the business community relative to achieving the above is recognizing and respecting the notion that ideas and innovation (intellectual, relationship, and structural capital) produced and executed internally, constitute intangible assets! Instead, capital of this nature is routinely and unceremoniously embedded in a company’s products and services without fully appreciating its contributory value to a company, i.e., reputation, brand, and goodwill, or its contribution to delivering valuable competitive advantages.

And, unfortunately, it’s still likely substantial benefits like these will go un-noticed, un-respected, undervalued, and equally important, un-protected.

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