Valuation in an Information EconomySep 28, 2017 Blog Intellectual property , Tangible vs Intangible assets
Investment in intangible assets has become a much more attractive proposition than investment in machinery, equipment and other tangible things. This is particularly evident in the US where companies collectively hold more than $8trillion in tangible assets.
One of these assets stand out from the others and that is intellectual property – the bread and butter of any modern organisation. This baffles investors though as the valuation of intellectual property and other intangibles can be misrepresented by unsuitable accounting policies and valuation methods. These methods are not necessarily compatible with the technological developments of the 21st century.
In the US, and elsewhere, regulatory bodies only recognise intangibles when a transaction such as an acquisition takes place – this does not account for the existing intangibles which obviously also has shareholder value as well. Furthermore, the classification of expenses may not portray certain metrics which affects valuation models such as discounted cash flow, particularly where R&D is concerned. This is labelled in the income statement as operational expense while it actually represents an expense that creates long-term economic benefits. A more accurate representation of earning is created if you manually reconfigure the income statement to reflect R&D as a capital expense rather.
The solution therefore lies in acknowledging the value of intangibles within the reporting framework like some countries are starting to do. China, for example, is slowly shifting away from capital intensive industries to technology and services.
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