It is difficult to measure the exact value of intellectual property that is expressed in Balance Sheet in the form of Intangible Assets.
It is because there are no two firms that are identical. Each of them will value its Intangible Assets differently. In addition to that, very often businesses do not include Intangible Assets in their Balance Sheets at all simply because they do not know how to value them, or it is too complicated to put the numbers on something invisible.
The two main problems that emerge regarding valuing Intangible Assets in a firm are as follows:
- What should be included in Balance Sheet under Intangible Assets?
- How to value these items in terms of money?
As a matter of fact, although Intangible Assets do not exist in a physical sense, they add value to a business. Have you ever wondered how much is Google really worth? How about the Coca-Cola brand? How do we value the goodwill of teachers in the school, or doctors at the hospital?
Problem 1: What counts as Intangible Assets?
In order to value Intangible Assets, business managers should value each Intangible Asset separately. Specifically, we should manage to put the price tag on:
- Brands.
- Trademarks.
- Patents.
- Copyrights.
- Goodwill.
There are also other aspects of a business that can be included on the list. For example, all the capital spent on research and development into new products, or all the expenditure on workers’ training and education.
Problem 2: How to value Intangible Assets quantitatively?
1. Subjectivity. The subjective nature of valuing Intangible Assets renders it very difficult to include in Balance Sheet. There is very large scope for adjusting the value of these intangibles in order to give a better picture of the company’s overall position. Hence, disputes can arise between accountants. And, window dressing of Final Accounts can reduce their objectivity.
2. Revenue generation capabilities. While some Balance Sheets do not usually record Intangible Assets unless the firm is acquired, for other companies, intellectual property is their main source of earnings. Especially in the modern knowledge-based economy such as for scientific research companies, publishing houses and music studios, companies with famous brand names, etc.
3. Amortization. Amortization has to be considered regarding the inclusion of Intangible Assets in Balance Sheet. While depreciation reduces the value of Fixed Assets over time, amortization is used to reduce the value of Intangible Assets as the time goes by. For example, when copyrights and patents near their expiry date, their value tends to fall drastically.
In general, Intangible Assets are difficult to put a value on. Nevertheless, the market value of companies with considerable Intangible Assets will be much greater than the value of their Net Assets, if these companies were taken over.
