What happens when companies undervalue intangible assets?

Correctly valuing intangible assets is a significant challenge for businesses across many sectors. Naturally, it’s far harder to give an accurate assessment of price for things that lack physical substance – like copyrights, patents or trade names – but that’s not to say that valuing such assets correctly is optional, or less important. Indeed, a new report highlights the risks of placing too little value in these possessions.

The report, published by the Chartered Institute of Management Accountants (CIMA) and Brand Finance, warns that the failure to accurately value intangible assets is making the UK’s businesses a target for asset-stripping takeover bids.

The UK’s intangible economy: The scale of the problem

According to the study, this is a major issue for the UK, which has the world’s fourth most “intangible economy”. Such possessions account for almost 64 per cent of the value of UK companies, due in part to the prevalence of firms in intangible asset-reliant industries like pharmaceuticals, aerospace and engineering, and luxury goods.

The Global Intangible Finance Tracker, which examines 58,000 companies across 120 stock markets, revealed that undisclosed intangible value has risen to $27 trillion (£18 trillion), representing an increase of 50 per cent since 2012. More than a third of the average firm’s enterprise value now stems from these assets, although this climbs as high as 70 per cent in certain sectors, such as advertising and pharma.

While it may lead to economic gains in the short term, failing to properly account for intangibles ultimately damages long-term value and poses a substantial threat to service sector-dominated markets like the UK. In particular, the report highlighted that this could result in the undervaluation – and subsequent acquisition – of strong brands such as AstraZeneca and Cadbury.

Of these intangible assets, almost $1.58 trillion are not disclosed on balance sheets, meaning they are easily overlooked by the C-level staff who should be protecting them. And there are many parties that are interested in cashing in on this oversight, the report warns; companies in Asia, the Middle East and Russia are especially keen to snap up established British brands at a knock-down price. Given that markets rise and fall, a drop in share prices can leave UK businesses open to bids from opportunistic buyers, who could potentially show skant regard for the firm’s long-term prosperity.

What does this mean for the future?

Unless companies are prepared to take the time to get a firm grasp on the real value of all intangible assets they hold, they will remain open to asset-stripping. 

Brand Finance chief executive David Haigh stressed that the issue of undervaluation must be resolved swiftly to “avoid further national treasures such as Cadbury being left to the mercy of foreign buyers and taken over for less than they are worth”.

He said it is absolutely vital – at a time he described as the next great boom in mergers and acquisitions – for businesses to fully explain intangible asset values to key stakeholders.

Mr Haigh’s comments were echoed by Charles Tilley, chief executive of the CIMA, who said: “This report raises a very important question around the strategic imperative for organisations to tell the whole story. 

“While undervaluing intangible assets and, as a direct result, their companies appears to be a particular issue for emerging markets, the UK must also continue to improve upon its intangible asset valuation and reporting.”