Columns
Knowing your intangible assets
Lau Wai Seang 
Alipay, eBay, booking.com, traveloka, expedia, and airbnb are examples of companies with IAs – Bloomberg
advertisement[x]

Ever wonder why some businesses in the new economy command value in the millions or billions of dollars? We do not see these companies owning huge physical assets except for a platform to operate their businesses which are manned by a minimal number of people.

Much is known about real assets, which are assets that we can feel and touch, such as landed or stratified properties, plants and machineries, stocks and monetary assets. However, there is a group of lesser-known assets called intangible assets (IAs).

Alipay, eBay, booking.com, traveloka, expedia, and airbnb are examples of companies with IAs. As the name suggests, IAs are assets which have no physical presence. Due to this non-tangible existence, this asset group receives little recognition for its economic importance in this part of the world. These are assets of the new economy.

 

Where are the IAs?

There are four groupings of intangible assets:

a. Contractual relationships

b. Non-contractual relationships/arrangements

c. Undefined intangibles (goodwill)

d. Intellectual property (IP)

In the business environment, a loss of service or employment contracts can seriously dent the profit at the end of the day. For instance, the departure of a key person in the development of an IT software is definitely detrimental to the company in selling its software products. Likewise, non-contractual relationships such as the producer accommodating to the requests of a buying company in emergency situations means a lot to the survival of the purchasing company.

Of all the IA groups, IP is the most recognisable as it can be legislated under specific laws and protected by these laws, though these protections must be registered with an IP authority and are territorial in nature. The IPs are creations of the mind which had been transferred into forms and are used in the commercial sector. Common IP types are copyrights, trademarks, patents, confidential information and industrial designs. Lesser-known IPs include plant variety, geographical indications and internal layout of integrated circuits.

In commerce, IAs and IPs may be grouped as follows:

a. Marketing-related (for example, trademark, patents, confidential information, trade secrets, mastheads, domain address, trade dress)

b. Artistic-related (such as copyright, industrial design, music, broadcast and costume rights)

c. Technology-related (for example, patents, soft codes, database)

d. Customer-based (customer list, client relationships, supplier relationships)

e. Contract-based (licences, workforce contracts, franchise contracts, operating and usage rights)

f. Government-based (SIRIM certifications, halal certifications).

 

Why value the IAs?

IAs do create value. Being an asset group that has no physical presence, the values are derived from the rights created by the IAs. These rights are detachable from the other assets, as the owner is able to sell, license out or in, or exchange the rights with another party.

Though the bulk of IA valuations are used in commerce, valuation is also needed on an individual basis.

In a business, IA valuations pertain to financial decisions, strategic organisational purpose or litigation claims. In the event a business owner needs financial assistance, the IAs may be monetised to collaterise this fund. There are countries where legislations had been formulated requesting the financial institutions to afford loans collaterised by IPs.

Then there are cases where business owners need to know the business value of their IAs in the event they need to take in a partner, to liquidate the business or to dissolve the partnership, or when they need to plan for the opening of a new branch. Where an owner is employing a personnel or team of expertise strategic to business advancement, he will need to know how much this person or team is worth to his business.

There are many instances of infringements of IP rights, especially in the information and communication technology (ICT) industries and carbon copying of merchandise. Thus the need for IA values to be determined due to damage claims in litigation cases. Countries where the transfer of IPs is mandated to pay tax will also need the valuation of the IPs.

In the individual capacity, the distribution of assets upon demise or divorce may call upon the IAs to be distributed too. In instances where the individual intends to donate his IAs, the donor may want to announce the value of the donation. Such valuation practices are common in the US and Europe.

 Where an individual decides to join or leave an organisation, he may want to know his value to that organisation for the purpose of remuneration or compensation negotiations.

 

Who is able to value IAs?

In Europe and the US, there are professionals who focus on determining the value of IAs and IP rights. They are commonly referred to as business valuers, or valuators, or appraisers. Many started as accountants but there are also many with other professional qualifications.

The current practice of having accountants valuing IAs is common in most countries, Malaysia included.

However, going forward, the professional valuing of IAs is developing along the trend in the West. These business-valuing professionals are also available in Malaysia, albeit small in number. The valuation practice by these professionals here takes into consideration the best practices and guidelines of Europe and the US.

The Royal Institution of Surveyors Malaysia (RISM) is a source of reference for IA valuation services, too.

Datuk Sr Lau Wai Seang is the president of Royal Institution of Surveyors Malaysia



This article first appeared in Focus Malaysia Issue 262.