Companies must push for greater transparency on intangible assets

INVESTMENTS in “intangible” or non-physical assets soared during the pandemic – from hawker stalls setting up online shopfronts to biotech firms filing vaccine patents. With the rise of the knowledge economy, intangibles make up more than 90 per cent of the value among S&P 500 companies.

Yet, this group of assets remains poorly understood and presented to stakeholders. This needs to change.

Singapore has made a significant step forward in this regard. On Monday (Sep 4), a new framework was launched to provide companies with more guidance on how to identify and communicate the value of their intangible assets. It is touted to be among the first of such frameworks globally.

Called the Intangibles Disclosure Framework (IDF), the initiative was launched by the Intellectual Property Office of Singapore (Ipos) and Accounting and Corporate Regulatory Authority (Acra). It was developed by an industry working group with representatives from the accounting, valuation, legal and financial sectors.

Investors are typically familiar with intangible assets in the form of registrable intellectual property (IP), such as trademarks and designs. And yet there is so much more to this class of assets, which can include technical know-how, trade secrets, brand value and even fuzzier concepts such as the value of the company’s workforce.

Unlike real estate or physical inventory, such assets can be tricky to value, or even identified correctly. Sizeable portions of them are not reflected in balance sheets either, noted Srividya Gopal, managing director and South-east Asia leader at Kroll and a member of the working group behind the IDF.

“Intangibles can be captured in the financial statements only to the extent they are acquired based on the current accounting standards… but (significant amounts) of these intangibles are actually self-generated and do not get reported anywhere today, except some capturing of costs,” she explained.

Stakeholders, such as investors, lenders and board members, often have little clarity on key questions. These include the risk-return profile of intangible assets, how critical they are to the business’ long-term value, and what their “economic life” – the period of time for which they are useful to the owner – is.

Such opacity can leave room for companies to hype up their intangible assets – such as software products – and stir stock market excitement, without investors fundamentally understanding the nature and limitations of these assets.

Leaving intangible assets in the shadows can also be a big missed opportunity for companies. For one thing, proper disclosures and valuation would give companies more bargaining power in commercial discussions.

For instance, a company with detailed documentation and valuation of its patents and technical know-how could use these assets, in place of cash, to secure a stake in a joint venture.

Intangible assets could also unlock more financing opportunities – which is especially critical for asset-light tech startups that struggle to secure traditional loans.

Financial institutions, venture capitalists and valuation firms could use information on a company’s intangible assets to potentially extend credit lines or provide higher valuations for an enterprise’s value, noted Murli Ravi, managing partner of venture firm Tin Men Capital.

He added: “Consistent disclosure of intangible assets can improve market transparency, which may increase investment confidence in commercial transactions involving intangible assets.”

Getting a head start

While there is a strong case for more disclosure on intangible assets, companies may not actually know where to start. This is where the IDF could provide more clarity.

The framework comprises four pillars: strategy, identification, measurement and management.

The starting point is for companies to first recognise what strategic role intangibles play in their business. They then need to identify and categorise if they are related to marketing, customers, contracts, technology, human capital or artistic aspects of the business.

The next step is harder: setting out what metrics can be used to assess the performance of the intangible assets, as well as measuring the assets’ monetary value. The latter is optional, as the current focus of the IDF is “awareness creation” rather than stipulating onerous requirements, said Gopal.

“We want businesses and stakeholders to understand the value of this intangible asset framework. Once they realise the value of this, they will be willing to pay for assessing the monetary value of the intangibles,” she said.

The final pillar – management – involves disclosing how a company handles the opportunities and risks around its intangible assets, and its long-term plans for the assets.

The IDF is voluntary at this point, and is not designed to supersede current regulatory requirements. It is also more “principles-based” than prescriptive, noted Gopal.

That said, there may arise a need in future for intangible asset disclosures to be mandated, given their increasing relevance in the knowledge economy. Singapore itself is seeing a shift from the old-school economy of real estate and commodities, to digital apps and deep tech research.

Thus, companies should get a head start on making their intangibles more tangible to stakeholders.