Invisible, but Essential!
In this modern fast-growing world, innovation and technology have become very
competitive factors. Today, the significance of this innovation and technology
establishes that something may not be visible to naked eyes but has the
importance of diamonds for business organizations. These factors have swiftly
transformed the business economy, from establishing new industries to displacing
the older ones and have greatly increased the relevance of innovation.
industries are investing a humungous part of their incomes to develop new
technology and advancing creativity, making the intangible resource, a valuable
asset. The intangible assets have immense efficacy in protecting the “creation
of minds” for the business with no physical embodiment.
Why Intangible Assets?
The intangible assets have a subset, often called intellectual property which is
legal protection to the creators and owners of inventions. Intellectual property
in the form of trademarks, patents, copyrights, or trade secrets has become the
foundation stone for business organizations, critical to fostering
innovation and demand the attention of investors. They create a favourable image
of the organization and help the business organizations in reaping the
full-fledged benefits of their own innovation and creativity along with
providing competitive advantages as it averts the replication by potential
competitors. In other words, it protects an organization from outside use or
implementation without the consent of the said organization.
Business organizations with their names, reputation, market value or
differentiated characteristics influence the decision-making of their investors
and customers by deriving the social status. Hence, an organization’s
significant performance indicators are their intangible assets which also
provides future performance sustainability and acts as a driver of competitive
differentiation. Therefore, it establishes value and potential growth.
Classification of Intangible Assets vis-a-vis Intellectual Capital
Primarily, the classification of the intangible assets with respect to
intellectual capital are as follows:
comprises of the knowledge, abilities, experience, skills,
competence and intellectual agility of the individuals of a business
organization which is responsible for the success of the company. The theory of
human capital emphasizes on the added value by which people contribute to the
development of the organization.
comprising the patents, innovations, brands, processes and
other intangible intellectual property. The development of the structural
capital is connected with the external aspects such as making the image and
brand by making the company known to many customers and by presenting it to them
as a trustworthy and stable organization. The further categorization of
structured capital in relation to intellectual property are as follows:
The goodwill indicates the reputation of an organization and is reflective of
the future earning capacity of an organization. It can either be estimated or
purchased. The estimated goodwill is based on profit-earning and capitalizing
capacity whereas the purchased goodwill arises when an organization acquires
another business organization.
A trademark provides exclusive protection to a visual symbol, a word, or a label
of a business organization or its products. It is acquired to enable the
customers or investors to identify and differentiate the products and services
of the concerned business organization.
A patent grants exclusive rights to the inventor or manufacturer of a product
and focuses on guarding the rights of the inventor from outside intrusion.
Patents for any product could be acquired by either purchasing from the holders
of patents or creating a new product of their own.
A copyright is an exclusive right to reproduce, sell or publish artistic or
literary work and protects the expression of ideas. It is primarily an
artistic-related intangible asset. It provides legal protection by preventing
the competitors from reproducing or publishing the work of authorship.
- Trade Secrets
These are exclusive rights for the confidential information of an organization
which can cause heavy loss if licensed or sold. The information is secret that
is why it is commercially valuable and is known to very few people. It gives an
organization a competitive advantage over the competitors in the market. Trade
secrets can be a process, formula, design, practice or compilation of
information which is not known to everyone.
includes networking, alliances and relationships with the
customers, investors, and other significant stakeholders. It is also very
crucial for business organizations to maintain, manage and nurture the
relationship. If an organization has good relational capital then it will
attract more customers and investors.
Valuation of Intangible Assets
The various methodology that can be adopted for evaluation of the intangible
assets are as follows:
- Cost Approach
A cost-based approach focuses on the costs incurred to develop the intangible
assets and intellectual property. It considers two points, firstly, what is the
cost to create an asset and the cost to recreate the assets having similar
utility, given the current rates. The backlash of this method is that it does
not provide economic benefit to the asset-owner through its use. Also, it does
not capture the full impact of legal aspects of intangible asset management.
Although this approach covers legal costs associated with obtaining and
maintaining intellectual property rights, for example, costs of patent
protections and maintenance do not reflect the effect of any other legal
activity on the value of the assets.
- Market Approach
A market-based approach takes into consideration the comparable market
transactions of the same assets to determine the value. In other terms, the
value of the intangible asset is determined by making comparisons with the
actual sale of similar assets. When comparable intangible assets are identified,
this approach is preferred to yield accurate projections.
This approach fails to cover the full range of legal activities that affect
intangible asset value. To the extent that the comparable assets that form the
basis for the evaluation model have legal characteristics comparable to those of
the company applying the model, the legal attributes included in the said
approach are more likely to be valid.
- Income Approach
An income-based approach is attributed to the income of intellectual property
based on the past earnings of the organization and their predicted future
earnings. The value of an intangible asset is established with the help of
present income, cash flows or cost savings ascribable to intangible assets over
its economic life. This approach makes use of forecast future revenues to
develop a current estimate of asset value. It does not fully account for the
impact of legal rights on intangible asset value. It can effectively capture the
costs associated with obtaining and maintaining intellectual property rights.
However, it makes crucial to gauge the costs concerned with the enforcement of
In the growing economy of this world, intangible assets play a vital role in the
development of an organization, human resources, culture, relationships,
intellectual property, etc. Most importantly, they are the critical source of
competitive advantage. The knowledge and skills of the individuals of an
organization play a key role in the profitability, growth and survival of an
organization and therefore, it needs to be protected.
The valuation of these intangible assets needs to be disclosed to the respective
stakeholders to make them understand the value and growth of an organization.
These intangible assets legally protect the creators from piracy or theft of
their creation. The significant output was the realization of the fact that the
innovations in the perception of the importance of the intellectual capital and
its development and cultivation in the company are the most important for
companies. It was proven that the ability of a company to mobilize and utilize
the tangible and intangible assets is much more determining for its performance
than to invest in physical tangible assets and their management.