With a sturdy stride the elephant in the room is taking center stage. Intangible assets have in recent years become the focus of companies, financial analysts, investors, accountants and regulators alike in attempts to understand and narrow the gap between a company's book and market value. For most companies, intangible assets today are a major value driver and account for more than tangible assets; research estimates that between 70% and 85% of all assets are intangible but they go largely unaccounted in financial statements. For example, the balance sheet assets of Coca-Cola or Microsoft account for less than 5% of their total value.
Quantifying intangible assets has long presented a challenge for accountants and financial analysts. Different approaches compete on how to define, classify and incorporate these assets within mainstream accounting and valuation. As non-physical claims to future value or benefits, intangible assets include reputation, goodwill, brands, intellectual capital, organizational capacity for innovation, corporate culture, quality of management systems and the ability of management to navigate and compete in an increasingly complex business landscape. While a market for certain intangible assets, such as brand and goodwill, is created when a business changes hands, it is generally considered incomplete. So why the growing interest in intangibles, and why now?
As equity prices have increased beyond the intrinsic value of the underlying companies, the need to explain and justify these valuations has become more urgent for financial analysts. In other words, it has become important to differentiate between true long-term intangible value and short-term speculative investment.
Understanding how intangible assets can create future value may arguably lie at the heart of the business case for corporate responsibility. Much of the activity and effect of integrating corporate responsibility principles into operations — and managing related risks — are mediated through intangible resources and processes.
RATINGS: A TOOL FOR MANAGING EXTERNAL AND INTERNAL EXPECTATIONS
CoreRatings has been working closely with leading industry, business and risk management experts as well as financial institutions to compare views on material qualitative risks and opportunities, their sectoral differences, and their valuation. As companies increasingly adopt business models that stress the importance of their intangible assets, it is not surprising that investors are calling on companies to more visibly demonstrate how they are managing this aspect of corporate value, how they are working strategically to build long-term value and differentiate themselves from competitors.