BREDEMA

What is intellectual property worth? 

Issue No. and date: 3130 - 04/04/2005
Source: La Tribune

• The new IFRS accounting standards require listed companies to improve how they account for their intangible assets.
• However, valuing such items promises to be problematic.
  

There is no doubt; intellectual property rights are going to be subject to new scrutiny with the international IAS-IFRS accounting standards, applicable since January 1 to the consolidated financial statements of publicly listed European companies. Henceforth, these companies will have to fully integrate intangible assets into their strategy, which for many constitutes a mini cultural revolution.

“Up until now, numerous items in intellectual property (e.g.; brands, patents, know-how, etc., editor’s note) were not identified as such and remained grouped in the nebula of goodwill,” notes Alain Kaiser, a partner in the industrial property consulting firm of BDM. From now on, IAS 38 requires that intangible assets be accounted for in assets, which among other things, reorganizes intellectual property rights. But only rights acquired directly or on the occasion of mergers and acquisitions are affected by this rule. Moreover, IAS 36 makes provisions for an annual depreciation test on assets with an indefinite life to verify that they have not lost value. Other assets will only be tested in the event there is a sign of loss in value.

Consequently, intangible assets should be subjected to a thorough and costly audit whereas few companies quantify them clearly today. Of course the objective will be to distinguish the “nuggets” (to be carefully maintained) from the “millstones” (like the underused but automatically renewed brands) that will not be identified since they are hidden in the mass of goodwill. With an underlying question: what items can be used as an adjustment variable if needed?

Clearly management will be more exposed regarding its management of intangibles, especially vis-à-vis the financial markets. Some companies have clearly understood: “Management Boards increasingly have a member responsible for intellectual property management (e.g.; General Electric), whereas this was hardly the case five years ago,” underlines Alain Kaiser. “Groups are also beginning to designate intangible asset valuation managers (e.g.; Bouygues Télécom).” Another sign of the times: some professionals, who have seen the advantage positioning themselves in this niche market, are ready to help companies value their intangible assets (see below).

Given that the practice could prove to be quite complex, what do intellectual property rights mean? For example, it is not as easy to patent business methods in the United States as in Europe. Some items can also be difficult to identify. For example, how can one separate the Coca-Cola brand from the company name? “The two legal concepts are quite different, which usually means one can successfully obtain separable economic data,” explains Alain Kaiser. “Otherwise, an in-depth legal analysis is required, sometimes going back several decades to break down the items to be evaluated.”

Another problem is the valuation. How can the competitive advantage procured by a patent that blocks competition be measured or how can know-how be entered in the books? Alain Kaiser underlines, “the valuation does not pose any problems in itself. The difficulty consists above all in convincing management and the auditors (valuation generalists) to measure often very complex assets.” And to underline the problem, consider the multiplicity of data that has to taken into account in the valuation: marketing data, technological content necessary for the brand’s survival and economic and financial data.

This leads to grotesque situations. Even if the valuation problem is overcome, the comparability of listed companies’ financial statements (the main objective of the IFRS) will be difficult to achieve since only intellectual property rights that are not created internally are entered in the books. Hence grotesque situations arise as shown by the example of Diageo, owner of the Johnnie Walker and Guinness brands: one brand is not shown in the assets while the other is shown for millions of pounds following the merger with Grand Metropolitain. “Depending on each company’s history, the same brand can be highly valued or under-valued, which can considerably change the interpretation one accords to the figures in the company/s financial statements,” concludes Alain Kaiser.

“Few companies quantify their intangible assets clearly today.”

By Alexandra Petrovic