Unlocking Full Potential of Intangible Assets
US Tech, by Joseph F. Batty
Six valuable steps that help companies unlock the full potential of intangible assets.
It is commonly accepted today that the new economy is a function of technology. Some new manufacturers have little hardware at all, but only promising trademarks and patents. Unfortunately, despite the importance of these new assets to bottom-line profits, little of this potential gets represented accurately in financial statements, resulting very often in significant under-valuation of companies large and small.
By employing relatively recent and approved interpretations of the Generally Accepted Accounting Principals (GAAP), a business can significantly increase worth on paper. This storehouse of equity derives from the maximization of intangible assets such as Intellectual Property.
Realizing the importance of reflecting true value, it behooves every CEO, CFO, COO, and controller, to keep abreast of the current state of Intellectual Property valuation and capitalization. The following steps and pointers are offered to help organizations understand how to maximize the value of Intellectual Property and other intangible assets.
1. Understand the Different Types of Intellectual Assets.
Intellectual Property assets can typically be broken down into copyrights, trade secrets, patents and trademarks. The costs involved in the development of any of the above should be evaluated for inclusion in your inventory of Intellectual Property assets.
Even branding investments, company image development, and some advertising campaigns can be considered intangible property assets, if not specifically Intellectual Property. However, the value of these assets can increase the value of your company just as quickly as, say, software development costs. Be sure these are brought to the attention of your IP expert for possible inclusion in your initial inventory.
2. Carefully categorize how you will handle each asset: capitalize or expense.
FAS 86 specifically requires the capitalization of software development costs, once technical feasibility is established, yet it is not commonplace to see this done. Most companies usually write-off these expenses (as allowed for tax purposes). However, prudent business owners would want to follow G.A.A.P. and FASB procedures that mandate the capitalization of such costs.
3. Accurately quantify your capitalized intellectual assets.
Once all capitalized Intellectual Assets are inventoried, they should then be analyzed to determine how long they would provide future economic benefit to the company. A fine line must be walked during this process. Brash overconfidence risks putting your organization in confrontation with the SEC and IRS. On the other hand, timidness in valuating your Intellectual Assets can hamper efforts to obtain necessary capital or loans for business expansion.
The financial records of an organization should, therefore, be thoroughly examined to determine a realistic depreciation or amortization schedule for each asset category. Only the actual costs of assets may be capitalized.
Intellectual Property assets, in general are amortized on a straight-line basis commencing in the year following the expenditures.
Remember that intellectual property inventories often serve the purpose of valuing assets from the perspective of a third party, such as a purchaser, creditor, or investor. As such, they represent a form of due diligence.
4. Draft amended financial statements to reflect the changes.
Once the capitalization and amortization schedules have been completed, financial statements reflecting the new policies should immediately be prepared. Ideally, this should be performed for the previous three years.
Any changes in the company's financial statements must be reflected as a note to the financial statements. This provides full disclosure to the reader; be they a potential lender or current shareholder.
5. Always advise any external auditor of the change in policy.
If the company uses an external CPA firm to complete their statements, the firm will need to review the schedules and the note to determine whether there are any other necessary disclosures required, and to determine whether the changes are material.
6. Continue these policies well into the future.
Annual fine-tuning is often required. Stretching of G.A.A.P. principals must be avoided. For that reason, CFO's must go back every year to document that each asset is still performing. If yes, keep it. If not, write it off and be done with it.
Equally important for providing continuity, any new accounting and financial staff should be trained in the entire valuation and capitalization procedure. Consistency is important in defending your figures.
By being aware of and employing the above steps, your company's financial documentation will more accurately reflect the true asset position of the organization, and in most cases, result in an increase in the company valuation. Ultimately, managers will have a more realistic picture of the overall value of the organization. This strengthens management's hand during negotiations with shareholders, banks, or potential investors.
About the author
As a member of the management team at Beckett Advisors, Inc., a strategic marketing firm based in Los Angeles, Joseph F. Batty has accumulated 30 years of experience in Intellectual Property, finance, and accounting at high-technology organizations. Mr. Batty has helped businesses obtain equity financing, negotiated with debt financiers, and handled multi-million dollar mergers.
Contact him at (626) 791-7954