Valuing IP assets when they are created
– dealing with brand value
Recently, the Institute’s CEO Mark Crowe drew my attention to an interesting print interview with Professor Baruch Lev, a distinguished Professor of Accounting and Finance at New York University who is well known for his work on the valuation of intangible assets.
One of his central concerns with the way we treat intangible assets in accounting is the disconnect between when a valuable intellectual property asset is created and when the return on investment from the asset is achieved.
His main point here is that the way accountants handle this issue can lead to a distortion in a company’s accounts. Why? The problem lies in the common practice of fully expensing (or capitalising) research and development (R&D) and related costs in creating the intellectual property (IP) asset, while the positive cashflows resulting from the use of the asset may be months or years away.
Professor Lev proposes that we would get a more accurate appreciation of the true situation in our businesses if we could work out a way of calculating the value of the created asset earlier on, having regard to risk and [potential] return, and bring that value to book in some prospective manner. Indeed, that is just what he proposes should be done.
While this is an admirable proposal, there would appear to be significant obstacles in making such a calculation in relation to some types of market-based assets, even though there may be feasible ways of computing a valuation in the case of other types of IP.
What if the 'asset' is a new brand?
For example, if the IP asset is the formula for a drug that will cure the common cold, it should not be difficult to model cashflows using various risk and return ratios and to adopt a conservative valuation. This would undoubtedly reveal a very valuable asset.
But consider if the ‘asset’ we have just created is a new brand. If it really is a ‘new brand’ it is virtually impossible to model the generation of cashflows, since, even with the very best industry data, we cannot predict consumer response at all accurately. More importantly, we are in no position to even guess how the brand will generate/develop/assume brand equity, which may be where the real value is going to be found.
This problem is really brought into focus when a brand exists before the product that carries its name. Animated movie characters are a good example, where the character becomes more than a promotional endorsement device; it becomes a brand that generates sales of all sorts of products. In recent times, think Shrek.
Indeed, there have even been brands ‘invented’ without any reference to particular products. I came across such a case some years ago, where a brand called Survivor was developed. That was it, just a name and a logotype. The business idea was to licence the brand, mainly to marketers addressing youth-oriented markets, which was plausible enough.
In the end the project failed, but it could have worked and the brand would have assumed value. One of the problems with such a case is that at the outset it could be argued that it did not have any IP value at all until sales were generated because of it.
Whatever view you take, this issue highlights some of the challenges marketing will continue to face in dealing with the unusual intangible assets that are our stock in trade.
|
