Intangible Assets & Enterprise Risk Management (ERM)
by S. Varadarajan, CSQA
People are familiar with one form of Asset, which is the tangible Asset. Owning, using, accounting, depreciating, disposing are the activities in the lifecycle of a tangible Asset. These are reflected in the Enterprise’s books of accounts, while deriving the profit or loss. The tangible Asset are visible to the naked eye. . According to the experts the intangible assets are either Customer related, technology or market related. Design of product, know-how, patents, licences, brand equity, non-compete agreements, trademarks, goodwill form part this group namely the intangible assets.Intangible assets don’t have the physical value of say a men material, machine etc,. They are of potential value addition for an Enterprise and can be associated for its success or failure. These types of assets can be classified as either indefinite or definite depending on the specifics of that asset. A familiar one, the ‘Brand name’ or ‘logo’ is considered to be an indefinite asset, as it stays with the Enterprise as long as the Enterprise continues operations.
On the other hand, if an Enterprise enters into a legal agreement to operate under another enterprise’s patent for a specific span of time, with no plans of extending the agreement, it would have a limited life and would be classified as a definite asset. Auto giants having manufacturing agreement with the local manufacturer for specific model of vehicles is a clear example using the brand name or know-how or design.
Industry view is that corporate culture and reputation are intangible assets entity use to create a competitive strategic advantage to differentiate themselves from other entity to enhance performance. According to experts, ‘culture and reputation are considered intangible assets because each add value through differentiation, is rare, difficult to imitate, and without substitution’.
The intangible assets have to be managed through their life cycle as stated below, as it is as important as the tangible assets.
- Acquisition or development of intangible assets
- Identifying and recording intangible assets
- Safeguarding intangible assets
- Optimum deployment or use of intangible assets
- Mitigating risk related to litigation.
An enterprise can become a party to litigation in case of intangible assets in the following case. Unauthorized use of or by an enterprise’s intangible assets may often end up huge opportunity loss. The highest level of risk attached in today’s business is the stealing of intellectual property (IP) & information of an enterprise. A proper legally binding contract will provide a safe guard. Lack of internal controls aids to these kinds of risks. Clear policy guidelines procedures, a process for monitoring their compliance on an on-going basis is very essential.
Enterprise risk Management Practitioners (ERM) has a role here through their consultative approach. A general practice of accounting is, amortization, which is the practice of writing off the capital expense especially the expense on intangible assets such as copyrights, patents, goodwill ( that is purchased) etc, over a particular period of time. It should not be confused with depreciation as depreciation is with regard to tangible assets only. However it should be understood that this is a book entry only & does not involve any cash outflow.
In order to manage for performance and value to intangible assets, Enterprise and their Managers, as well as their investors, need a better understanding of their role as part of the entire value creation system of an organization. Under the Indian context, there is considerable protection under judicial framework to safeguard intangible assets. In India the initiative towards protecting the intangible resources was laid through the enactment of the patents and design act, 1911.
The other legislations for protection of intangible resources which are current:
- Copy right act 1957
- The Patents act 1970
- Trade Mark act 1999
- Design act 2000
In a knowledge based and service oriented scenario of today’s economy the above enactments are required to protect the interest of stake holders. The legal consequences of non compliances to the use of intellectual property (IP) is being part of the discussions in the board meetings now a days. So the awareness is fast spreading among the community. But, when it comes to implementing, there is not enough advisory input and road maps.
Appropriate controls are necessary based on the industry to which you belong. But these controls can be successfully implemented through proactive participation of the top management. They can only enforce it internally. Please bear in mind that it is tough to win a legal battle, though there is enough law and framework in place. Money, time, effort invested is not justifiable. Technology or process is only an enabler. It has a life span before it gets out dated. So who ever invented the wheel need to be given the honour and others are users or innovators of such invention.