Identification, Measurement and Financial Valuation of Intangibles: Difficult and Related Tasks

The management and valuation of intangible resources—also called intangibles—is undoubtedly a major business preoccupation. This is particularly true for knowledge-based resources, also known as intellectual capital (IC) (Hussi, 2004; Kaufmann and Schneider, 2004). A company’s intangible resources often account for a greater proportion of its overall total resources than its tangible assets do. However, the value of most intangibles does not appear on financial statements, largely because the lack of transparency and the absence of a benchmark market make it difficult to value them (Lev and Zarowing, 1998). Some authors see no need for explicit reports on the value of a firm’s intellectual capital, arguing that the market already does this by valuing its securities. This view would be correct if stock markets were continuously efficient, but this has proven not to be the case. Furthermore, the market always values the set of a firm’s intangibles, which means the problem of valuing them individually persists. Moreover, stock market valuations are not applicable to unquoted SME, being comparable listed companies hard to find. In the 1990s, demands from the corporate world prompted academic research to seek ways of reflecting the value of intangibles in financial statements (García-Ayuso, Monterrey and Pineda, 1997; Lev and Zarowin, 1998; Lev, Sarath and Sougiannis, 1999; Lev, 2001b; Cañibano et al., 2002). Unfortunately, the problem has largely resisted efforts to find a solution. The lack of an explicit valuation of intangible assets may encourage information asymmetries and inefficiencies on stock markets. Experience shows that when the value of intangible assets is included in the market analysis, forecasts on the future business performance improve, which highlights their importance in making the market efficient, reducing information asymmetries and thus the adverse selection risk. Apart from the advantages for financial market performance to be gained from fuller information about a firm’s intangibles, detailed knowledge of such intangibles inside the company is also very important: