Out of touch? – Managing and valuing intangible assets in a technology company
It can be tricky for many businesses to value intangible assets. From start-ups to major companies, much of their value is represented by something intangible. Taking Apple as an example, its market capitalisation is around US$750 billion, but its Balance Sheet net assets are only a tiny fraction of this.
Intangible assets are those that lack physical substance, i.e. you cannot touch them. They can be very difficult to identify and to value. But for technology companies, ranging from the smallest up to large ones such as Apple, they can be a significant value driver.
Intangibles are often unique to the business, making it difficult to compile an exhaustive list, but these are the most common:
- Software (for both internal and external use)
- Unpatented proprietary technology
- Customer lists and relationships
- Skilled and assembled workforces
- Patents, copyrights and licenses
- Trademarks and trade names
- Non-compete agreements
The valuation of these assets can be the main driver when agreeing the valuation of the business as a whole; an intangible asset can be the key component of a business acquisition.
The recent introduction of the new Financial Reporting Standard 102 (FRS 102) to replace old UK Generally Accepted Accounting Principals (UK GAAP) is now relevant to most companies as it came into force for smaller entities with accounting periods starting on or after 1 January 2016. Included within the new standard are changes relating to the treatment of intangibles.
Changes that may be of particular interest:
Software that has previously been recognised as a tangible asset will now need to be recognised as an intangible asset. Furthermore, the depreciation of these assets will need to be unwound and replaced by appropriate amortisation. In most cases, this will be a simple reclassification on the Balance Sheet. However, professional judgement must be applied to ensure that amortisation at the same rate as previous depreciation remains appropriate.
Corporation tax rules relating to intangible assets on business combinations, on or after 8 July 2015, do not allow for the amortisation of purchased goodwill, or for customer-related intangible assets to be a tax deductible business expense. Purchasers now need to be diligent and ensure that separately identifiable intangible assets have been correctly identified, valued and accounted for on consolidation. This, in turn, will ensure that future tax relief can be obtained on qualifying intangibles, which, in some circumstances, can lead to significant deductions.
The valuation process can be inherently complex and should be performed by a specialist. There are often cases where the information included in a sales and purchases agreement is not sufficient to determine the valuations of each class of asset. With forward planning, this can be addressed during the purchase process to avoid the complications of having to obtain valuations at a later date.