Business valuers recognise that intangibles present individual ‘facts and circumstances’ challenges. Some intangibles appear on the balance sheet; many do not. And IFRS 3, even without the proposed amortisation changes, does not fully report the current value of acquired or created intangibles (reported intangibles can only retain value or increase, but increasing the operational value of intangibles is generally a strategic goal).
One place to look for benchmarks is GIobal Intangible Finance Tracker (GIFT) from Brand Finance.
‘GIFT 2019,’ released last month, takes issue with accounting standards (again) since they do not reflect fair value. David Haigh, CEO of Brand Finance, writes:
This seems bizarre to most ordinary, non-accounting managers. They point to the fact that while Smirnoff appears in Diageo’s balance sheet, Baileys does not. The value of Cadbury’s brands was not apparent in its balance sheet and probably not reflected in the share price prior to Kraft’s unsolicited and ultimately successful contested takeover of that once great British company.
Financial statements would improve immensely if the bulk of intangible value creation, currently undisclosed, were reported. To put this in perspective, Brand Finance estimates the global value of undisclosed intangible assets to now surpass US$35 trillion. Compare that to Aramco’s new market float valued (at the moment of writing) at US$2 trillion. No wonder analysts struggle.
What can business valuers learn from ‘GIFT 2019’?
- These assets declined in value a disturbing 8% compared to last year. The decline is dramatic—and the first decline of any magnitude since 2011. Enterprise value during the same period went up 2% (the smallest increase in the total worth of the world’s publicly traded companies since 2011), and reported intangible assets increased 7%. ‘GIFT 2019’ emphasises ‘this type of reduction is normally only recorded in years of recession’ and suggests ‘key sectors have lost momentum.'
- Even for intangibles disclosed via acquisition, the overuse of goodwill weakens the quality of financial reporting. In one of the best ‘I told you so’ examples of the year, Brand Finance senior consultant Annabel Brown writes of her report last November identifying Debenhams, Dixons Carphone, Pets at Home, and Thomas Cook as UK enterprises with high booked goodwill vs enterprise value. ‘Since that article was released, Debenhams have narrowly avoided administration, Dixons Carphone has faced a 22% profit slump, Pets at Home has witnessed a surprising revival … and hopefully no readers recently booked a holiday with Thomas Cook.’ (That must have been an enjoyable sentence for Brown to write.)
- The ranking of companies by total intangible value changes completely when undisclosed values are included. At the top, you get Microsoft, Amazon, Apple, and Alphabet. If the analyst looks only at disclosed intangibles, you get a lower-multiple segment of the economy driven by the big acquirers—AT&T tops the list, followed by Anheuser-Busch InBev, Comcast, and British American Tobacco. Smaller enterprises are less likely to have major internally generated brand values, but the trend still follows that higher-valued companies tend to have higher undisclosed intangibles.
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