As a consequence of a study by Brand Finance plc in conjunction with CIMA, the old chestnut of assessing the value of a company's intangible assets is back in the public domain.
A myth has been created that says that the aggregate value of a firm’s intangible assets can be deuced as the difference between:
- a) its market capitalisation, i.e. the number of shares in issue multiplied by the price which brought the supply and demand for small lots of shares into equilibrium at a point in time, say at close of play yesterday; and
b) the value of the net assets attributable to its shareholders as shown on a balance sheet at some different point in time, say at the end of the last financial year.
Even without the mismatch in time, you might ponder the implication that it is only quoted companies that have intangible assets. What about privately owned ones, or enterprises in the public or charitable sector? What about CIMA itself?
Those promoting these ideas go on to criticise the accounting concepts that relate to balance sheets for understating the total value of the company in question. Surely, they argue, it is necessary to identify its intangible assets and, at least, show their values as an addendum.
For me, this shows a lack of understanding of the purposes of accounting statements as they have been produced for over five hundred years. The balance sheet does not purport to show the value of the company nor even the value of its tangibles assets. Rather, it aggregates the costs that have not yet been charged against income (to arrive at realised profit).
The fact is that the whole of the value of the company is intangible, because it is subjective and therefore not auditable - but it is manageable!
David Allen's courses on Managerial Megatrends and Strategic Financial Management explore intangibles, and the management of value.
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