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Intangible Assets for a Business Organization and its Valuation

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.

The 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:

Human Capita:

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.

Structured Capita:

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:

  • Goodwill
    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.

  • Trademarks
    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.

  • Patents
    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.

  • Copyrights
    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.

Relational Capita:

 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 the rights.
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.

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