They are hidden, but crucial; silent, yet munificent and abstract, but pressing….
Intangible assets are proving to be the key drivers of corporate worth; thanks to the digital shift in the economy. Gone are the days, when one judged a company looking at the bulk of its inventories. Decision makers now focus more on the corporate’s intangibles (say intellectual property) to rank its repute.
How could these unseen assets, which are not even visible on the balance sheet, stimulate a push for the company’s market value? Continue reading for more insights.
A study  of S&P 500 market value for 40 years, from 1975 to 2015, reveals the growing importance and contribution of intangibles to growth. In1975, more than 80% of the average valuation of companies on the S&P 500 was represented by tangible assets such as property, plant and equipment, etc. But by 2015, with more than 80% of an organization’s value being represented by intangibles such as intellectual capital, corporate culture, supply chains, other ecosystems and networking, the shift in the asset base is glaring on the balance sheets.
What are Intangibles?
According to IAS 38 of IASB, ‘An intangible asset is an identifiable non-monetary asset without physical substance. Such an asset is identifiable when it is separable, or when it arises from contractual or other legal rights.’ Its use or transfer would be compensated if it occurred in a transaction between independent parties in comparable circumstances .
Over time the perspective of an intangible asset has shifted from a narrow perspective of R&D spending and technology know-how to a broader view. Employee skills, analytical information, key designs, managerial know-how, brand equity, etc., have now proved their value and are considered intellectual property today.
Classification of Intangibles
According to one classification  of OECD intangibles are grouped into three categories:
|# Group||Title of Group||Industries|
|1||Computerised information||Software and databases|
|2||Innovative property||Scientific and non-scientific R&D, copyrights, designs, trademarks|
|3||Economic competencies||Brand equity, firm-specific human capital, networks joining people and institutions, organisational know-how that increases enterprise efficiency, and aspects of advertising and marketing|
The First Recognition of Intangible Assets, as the Real Source of Competitive Advantage 
In 1987, Itami and Roehl in their book, ‘Mobilizing Invisible Assets’, introduced the concept of ‘invisible assets:’ where they provided an intuitively appealing way to recognize the vital contribution of accumulated experience and information to a corporation’s strategic resources. According to them intangible assets, such as a particular technology, accumulated consumer information, brand name, reputation, and corporate culture, are invaluable to the firm’s competitive power and are often a firm’s only real source of competitive edge that can be sustained over time.
Glaring Evidence of the Changing Scenario of Economies .
During the period of 25 years from 1995 to 2019 where the United States and ten major European economies achieved 63 % growth in gross value added (GVA), their investment share of intangibles increased by 29 % associating increasing investment in intangibles with increasing total factor productivity of the entire economy.
Sectors and Intangibles 
The correlation between investment in intangibles in certain sectors and GVA growth rates achieved by it is apparent.
|Sector||Investment in Intangibles on average||Growth rate achieved on an average|
|Sectors with above-average investments||More than 12% of their GVA||2.7 % in GVA per year, adding up to 28 % higher than other sectors|
|Knowledge-intensive services||15 % of their GVA||3.0 % in GVA per year|
|Innovation-driven services including information and communications technology (ICT)||17.4 % of their GVA||2.9 % in GVA a year|
Sourze: McKinsey Global Institite, 2021
Deployment of Four Intangible Assets
A study conducted from 1995 to 2019 on the deployment of 4 intangible assets by the United States and 10 European countries can be summarised as follows:
|Intangible Asset||Innovation Capital||Data and Analytics Capital||Human and Relational Capital||Brand Capital||Investment in Intangibles||% of GVA Growth|
|Average Investment/ Growth rate||3.7||1.7||2.8||1.0||9.2||1.8|
Source: INTAN – Invest; McKinsey Global Institute Analysis, 2021.
Skills Essential to Leverage on Invisible Assets:
- Incessant learning: To analyse and assess which intangible assets would be most likely to scale, deliver competitive advantage, and generate synergies.
- Persistent personalizing: Using data and analytics capabilities to integrate personalized experiences into customer journeys
- Ceaseless executing: Decisions followed by efforts based on data to ensure that disruptive ideas are developed and implemented
- Staying cognizant: Monitoring the skills to identify the intellectual property that delivers competitive advantage, in the required areas for innovation.
The new invisibles that joined the traditional intangibles are the real force driving the investor valuation. Professional valuers are struggling to develop reliable methods that can assess the true value of these invisibles.
Intangible assets pose a great challenge in the valuation and reporting of a company’s financials. For more insights, check out our online MBA program @ https://online.ifheindia.org/
Assuming that you are heading a digital-centric company, how to you propose to project the worth of your intangible assets to various stake holders?
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1. C. a. N. S. Gary Cokins, “The Power of Intangibles,” Strategic Finance, May 1, 2007.
2. “Identifying intangibles and risks for DEMPE,” Royalty Range, July 2018.
3. OECD, “New sources of growth: intangible assets,” OECD New Projects, September 2011.
4. H. I. w. T. W. Roehl, Mobilizing Invisible Assets, Cambridge: Harvard University Press, 1988.
5. M. Quarterly, “The invisible edge,” McKinsey Digital, 2021.
6. Eric Hazan, et al., “Getting tangible about intangibles: The future of growth and productivity?” McKinsey & Company, June 16, 2021.