Risk management Intangible assets features@theactuary.com
Underestimating the value of intangible assets is a costly route to irreversible
POSSESSIONS On average, some 80% of the value of companies now arises directly from intangible assets, including intellectual property (IP). As with any asset, when intangible assets are not effectively and consistently safeguarded and their risks not managed, they become vulnerable to competitive threats and so much less valuable. Interest in intellectual property management and securing value from intangible assets has grown considerably over the past decade with the recognition of their contribution to company value and of the growing threat from counterfeiting. With economic uncertainty and regulation increasing in the financial services industry, organisations in this sector need to use every tool at their disposal. Leading financial services firms are aware that IP can be helpful in differentiating themselves and that intangible assets are invaluable in raising funds and finance. According to the United States Patent and Trademark Office, the number of patent applications in the financial services sector increased to 17,213 in 2010. The number of insurance patents has increased from around 25 per year between 2000 and 2005 to about 275 per year in 2010 and 2011. Those in finance have increased by around 20 times during the same period. Any company keen to protect its intangible assets needs to consider what these are, what
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they are not, and how they can be developed to create contributory value, sources of revenue and competitive advantage. All directors should understand the increasingly sophisticated threats to intangible assets, the various ways they can materialise and what tools are effective to protect the assets. However, the challenges of establishing effective IP management within a business, financial reporting constraints and working out where responsibilities lie between functions mean that intangible assets are often misunderstood and consequently undervalued. Research from The Intellectual Property Crime Group has revealed that 40% of businesses surveyed took no practical action such as trademark registration or employee training to protect their IP. Business Action to Stop Counterfeiting and Piracy claims that the total global economic value of counterfeit and pirated products is as much as $650 billion every year.
What are intangible assets? Businesses often think that intangible assets are just about ensuring that trademarks are in place. In fact, it is about a lot more than that. IP is an important piece in the intangible asset jigsaw, encompassing the whole way in which a company does business. Intellectual property means protecting your brand name and your products and services by patents, trademarks, copyright,
designs and trade secrets. Intellectual assets are associated with the people-based assets of a company – for example, key skills, knowhow and processes: the way your people do business. The wider intellectual capital encompasses the other intangible assets of a company, including relationships, branding, reputation and contracts, which offer a route to commercialisation. All these have a value. Identifying the intangible assets within the business may not be straightforward. You may need an audit to identify them and assess which may be of significant value.
A question of value It is only recently that organisations have tried seriously to put a value on intangible assets. Valuing intellectual property accurately and putting a monetary value on it can be contentious, but is possible – and essential. Just like other assets, IP can be valued – and bought, sold or leased. Anyone involved in selling or acquiring a company or portfolio should establish what intangible assets the target company or portfolio owns, whether they are live and valid, their value, and whether they are fully protected in all jurisdictions. The financial approaches used in the valuation process are similar to those used to value many tangible assets. Examples include the cost approach, the market approach, the income approach or a combination of these.
THE ACTUARY • June 2013 www.theactuary.com
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