The International Accounting Standards 38 (IAS 38) defines an intangible asset as: "an identifiable non-monetary asset without physical substance." The International Financial Reporting Standards Committee developed IAS 38 to manage the financial accounting and reporting of intangible assets. Intangible assets include intellectual property such as patents (technology), trade marks (brands), franchises, designs, copyright, trade secrets, confidential information and know-how.
As mentioned, intangible assets are non-physical assets as reflected on a company's balance sheet that indicate the potential for future economic benefits. Under the Generally Accepted Accounting Principles (GAAP), intangible assets are categorized as either acquired intangible assets or internally generated intangible assets. In terms of IAS 38, internally generated intangible assets cannot be reflected on the balance sheet of companies or corporations.
By way of illustration, if Company A acquires a patent for technology through their own labour, time and expense, this will constitute an internally generated intangible asset which will consequently not be reflected on their balance sheet. Whereas, if company B assigns or licenses their patent to company A, it can be recorded as an intangible asset. Thus, financial statements fail to provide a true reflection of the company's financial position in respect of internally generated intangible assets.
In consideration of the above, the value of intellectual property is vastly misunderstood and undervalued. Intellectual property assets differ from other intangible assets because these assets come into existence by operation of law. Over the last decade, more companies have realized that their intellectual property assets are in fact worth more than their tangible assets. To substantiate the above, PricewaterhouseCoopers (PwC) conducted research in 2014 reflecting, on average, 75% or even more of a companies' total asset value comprise of intangible assets. This is often the case for companies with a well-known brand name.
The real value behind intangible assets lies in the exploitation thereof. An intangible asset carries strong legal rights, including but not limited to ownership and the right to license such intangible asset. The value of these intellectual property rights is derived from the monopoly right granted to the proprietor by statutory or common law principles.
The first step to unlocking the value of intellectual property as an intangible asset is to register the intellectual property with the relevant body in order to confirm statutory law protection. After registration, it is important to know that enforcement of intellectual property rights must form a critical component of intangible asset management. These intellectual property rights become more valuable when the proprietor protects its property rights through registration, litigation and licensing.
Considering the nature of intangible assets and IAS 38, accurate intellectual property valuations are an absolute necessity when it comes to determining the value of a company's total asset value. Be sure that these hidden intellectual property assets contain the key to successful company purchase price negotiations. Quite impressive for an asset "without physical substance"!
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